Chapter 1

The University of California Undermined Its Commitment to California Resident Students in Exchange for Revenue Generated by Nonresidents

Chapter Summary

The University of California’s (university) desire to increase its nonresident supplemental tuition revenue (nonresident revenue) appears to have significantly influenced its admission decisions, at times at the expense of residents. In fact, while the university admitted 2,600 more residents in academic year 2014–15 than it did in academic year 2010–11, a 4 percent increase, at the same time it increased the number of nonresidents it admitted by 182 percent, or 17,200 students.1 This significant increase in nonresidents coincided with the university’s decision in 2011 to lower its admission standard for nonresidents. As a likely result, over the past three years, the university admitted nearly 16,000 nonresidents who were less qualified on every academic score we evaluated than the median scores for admitted residents. Further, the university made it less appealing for the residents it did admit to attend the university by denying an increasingly large percentage of them admission to a campus of their choice. In contrast, nonresidents, if admitted, are never denied admission to a campus of their choice. The university’s admission decisions have also hampered its efforts to meet its own and the Legislature’s desire that the university’s student body reflect the diversity of the State because, as of academic year 2014–15, only 11 percent of domestic undergraduate nonresidents were from underrepresented minorities.2

In addition, since academic year 2005–06 the university has increased mandatory fees—base tuition and the student services fee—for residents six times, resulting in an overall increase of 99 percent, from $6,141 to $12,240; however, the university has not conducted a usable study to determine the costs of educating its students, thereby limiting its ability to appropriately justify these tuition increases. Although the university objects to using cost studies, other states’ public university systems have developed cost studies upon which decision makers base those institutions’ tuition and funding, suggesting that such an approach is both feasible and beneficial. By using a cost study, the university would have a reasonable basis for the amount it charges for tuition.

According to the university, losses in state funding necessitated its increase in nonresident enrollment and tuition. Based on the university’s assertion that it increased nonresident enrollment because of decreased state funding and rising costs, we expected it would have decreased—or at least held constant—its nonresident enrollment when state funding began to increase; however, that was not the case. Because the university’s actions have had significant adverse repercussions for residents and their families, we believe that legislative intervention is not only warranted but necessary to ensure that a university education once again becomes attainable and affordable for all residents who are qualified and desire to attend.

On a Variety of Academic Indicators, the University Has Admitted Thousands of Nonresidents Who Were Less Qualified Than the Upper Half of the Residents It Admitted

Over the past 10 years, the university has admitted thousands of nonresidents who were less qualified than the upper half of residents it admitted on every academic indicator we evaluated. At the same time, the university reduced the percentage of residents it admitted from 77 to 62 percent, and increased the percentage of nonresidents it admitted from 48 to 56 percent—nearly 21,700 nonresidents. As a result, nearly one-third of the students the university admitted in academic year 2014–15 were nonresidents. These trends cannot be attributed to a decrease in residents’ demand for a university education. On the contrary, the number of resident applications increased by nearly 22 percent from academic years 2010–11 through 2014–15, from about 82,000 applicants to nearly 100,000 applicants.

Beginning in academic year 2010–11, the trends became especially stark: The university admitted only about 2,600 more residents to a campus of their choice in academic year 2014–15 than it did in academic year 2010–11, a 4 percent increase, while during the same time it increased the number of nonresidents it admitted by more than 17,200 students, or 182 percent. Moreover, the percentage of residents the university admitted actually decreased from 72 percent in academic year 2010–11 to 62 percent in academic year 2014–15, as depicted in Figure 4. Conversely, as shown in Figure 5, over the same period the trends for nonresidents show significant increases in applications, admissions, and enrollment.

Figure 4
Despite an Increase in Resident Applicants, the University of California Has Kept Resident Undergraduate Enrollment Flat

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 1: Before academic year 2011–12, the university admitted nearly all of its referral pool to either the Merced or Riverside campus. Beginning in academic year 2011–12, the university only referred applicants to its Merced campus, and Merced began contacting referral applicants to confirm their interest in attending the campus before admitting them.

Note 2: Because an applicant can apply to multiple campuses, we count an applicant only once, regardless of the number of campuses to which the applicant applied.

Figure 5
The University of California Has Admitted and Enrolled Increasing Numbers of Nonresident Undergraduates

Sources: California State Auditor’s analysis of data obtained from the University of California Office of the President’s Undergraduate Admissions System and other operational data.

Note: Because an applicant can apply to multiple campuses, we count an applicant only once, regardless of the number of campuses to which the applicant applied.

These trends are in part caused by university policy changes. In 2011 the university revised its admission standard for nonresidents, which had the effect of making it easier for nonresidents to gain admission. The Board of Admissions and Relations with Schools (BOARS)—an entity within the university’s academic senate charged with developing admission criteria—developed the university’s policy related to nonresident undergraduate admission principles in 2009. One of the principles in the policy reflected the Master Plan’s recommendation that nonresidents should demonstrate stronger admission credentials than residents by generally requiring that nonresidents possess academic qualifications in the upper half of residents who were eligible for admission. However, BOARS made changes in 2011 that lowered the standard necessary for nonresident admission.

According to BOARS, at the time the Master Plan was written, eligibility was essentially synonymous with admission, indicating that campuses were admitting all eligible residents. However, because campuses became more selective over time, with some admitting one-quarter or fewer of their eligible applicants, in 2011 BOARS eliminated the wording in its 2009 nonresident undergraduate admission principles that nonresidents “should demonstrate stronger admissions credentials than California residents by generally being in the upper half of those ordinarily eligible” for admission. Instead, BOARS revised this principle to state that admitted nonresidents should “compare favorably to California residents admitted.” The revised principle left the application of the “compare favorably” standard up to the campuses, which BOARS believed were capable of making appropriate admission judgments. BOARS did specify, however, that as campuses recruited more nonresidents in difficult financial times, they should remember two other principles for nonresident enrollment: That nonresident enrollment should not be an exclusively revenue-producing strategy and that fiscal considerations should not be a primary factor guiding admission decisions.

In part as a consequence of BOARS’ revision, the university admitted nearly 16,000 nonresidents from academic years 2012–13 through 2014–15 who were less academically qualified on every academic indicator we evaluated—grade point averages (GPA), SAT, and ACT scores—than the upper half of residents whom it admitted at the same campus, as shown in Figure 6. Had the university followed the Master Plan, it would not have admitted these nonresidents and could have instead admitted additional residents.

Figure 6
The University of California Admitted Nearly 16,000 Nonresident Undergraduates Over the Past Three Academic Years With Grade Point Averages and Scores on All Tests That Fell Below the Median of Admitted Residents

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 2: To be consistent with Table 6, we did not include academic year 2005–06.

Note 3: We conducted our analysis based on applicants’ scores and grade point averages at each campus. If a nonresident was admitted at more than one campus with all scores and grade point averages below the median of admitted residents, we counted that nonresident only once. We included nonresidents in the “At or above median on the least one academic score” category if they had at least one score at or above the median for every campus to which they were admitted. We also included 98 nonresidents for whom the university did not provide any scores or grade point averages as at or above the median.

Furthermore, the university places extra weight on high school GPAs as a predictor of college performance. The average GPA for admitted domestic nonresidents for six of nine campuses has been lower than the GPA for admitted residents since academic year 2010–11.3 As we show in Table 5, the university’s practice of admitting domestic nonresidents with lower GPAs became widespread beginning in academic year 2010–11.

Table 5
In Recent Academic Years, Most Campuses Have Admitted Domestic Nonresident Undergraduates With Lower Weighted Grade Point Averages Than Residents They Admitted

Academic Year

Campus

2005–06

2006–07

2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14

2014–15

Berkeley

Resident

4.14

4.15

4.15

4.16

4.16

4.18

4.19

4.19

4.20

4.20

Nonresident

4.21

4.22

4.22

4.23

4.19

4.13

4.09

4.13

4.17

4.18

Davis

Resident

3.88

3.84

3.89

3.93

3.99

4.01

4.03

4.06

4.10

4.11

Nonresident

4.03

3.94

3.98

4.02

4.01

3.90

3.86

3.98

4.00

3.99

Irvine

Resident

3.88

3.88

3.92

3.94

4.00

4.01

4.00

4.05

4.07

4.09

Nonresident

3.93

3.95

4.00

4.01

4.04

3.89

3.85

4.01

3.94

3.95

Los Angeles

Resident

4.11

4.12

4.13

4.15

4.16

4.18

4.18

4.19

4.21

4.21

Nonresident

4.17

4.16

4.17

4.19

4.17

4.09

4.06

4.07

4.11

4.12

Merced

Resident

3.53

3.53

3.54

3.52

3.55

3.56

3.54

3.58

3.60

3.63

Nonresident

3.86

3.88

3.87

3.82

3.75

3.70

3.82

3.74

3.83

3.74

Riverside

Resident

3.58

3.56

3.54

3.55

3.63

3.64

3.68

3.72

3.73

3.78

Nonresident

3.88

3.85

3.84

3.84

3.81

3.78

3.78

3.68

3.72

3.77

San Diego

Resident

4.05

4.03

4.06

4.06

4.09

4.10

4.13

4.15

4.17

4.18

Nonresident

4.10

4.10

4.12

4.14

4.11

4.00

3.99

3.95

4.00

4.07

Santa Barbara

Resident

3.91

3.89

3.90

3.93

3.92

3.99

4.00

4.00

4.03

4.05

Nonresident

4.02

4.02

4.02

4.04

4.00

3.90

3.86

3.89

3.93

3.98

Santa Cruz

Resident

3.68

3.67

3.66

3.70

3.75

3.77

3.76

3.79

3.87

3.87

Nonresident

3.89

3.81

3.93

3.94

3.92

3.81

3.80

3.79

3.72

3.68

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 1: Red highlights represent average domestic nonresident weighted grade point averages that are lower than those of resident weighted averages.

Note 2: We did not include international nonresidents in this analysis to address the university’s concern that weighted grade point averages are not comparable to those of residents.

When evaluating all academic indicators separately in the context of the Master Plan’s recommendations, the university’s admission decisions have favored nonresidents. For example, as shown in Table 6, the university has admitted nearly 61,000 nonresidents with unweighted GPA scores that fell below the upper half of residents since academic year 2006–07—nearly 36,000 of those in the past three academic years after changing its admission standard. Moreover, in academic year 2014–15 alone, the university admitted more than 9,400 nonresidents whose SAT reading math scores and more than 11,200 nonresidents whose SAT writing scores fell below the upper half of residents’ scores.

According to the university’s associate president and chief policy advisor (associate president), GPAs and test scores do not necessarily correlate to campuses’ admission decisions, largely because of the campuses’ comprehensive review processes. Moreover, she expressed concerns with the reliability of nonresident GPA data because students self-enter these data when they apply to the university. She stated that the university operates under the concept that the State must fund each resident enrolled, and because of state funding cuts, it has become more difficult for residents to gain admission. In contrast, she acknowledged that the university has made it easier for nonresidents to gain admission. Furthermore, she told us that campuses are still coming to understand how to interpret BOARS’ “compare favorably” principle and do not always interpret it correctly. She also acknowledged that the university has provided no written guidance to campuses related to interpreting the “compare favorably” principle. Nevertheless, the data suggest that the university has admitted many nonresidents who appear to be less academically qualified than residents.

Table 6
The University of California Has Admitted Increased Numbers of Nonresident Undergraduates Who Have Lower Test Scores and Grade Point Averages Than the Upper Half of Admitted Residents

Academic Year

Test Scores or Grade Point Averages (GPA)

2006–07

2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14

2014–15

Total*

ACT Composite

2,717

3,033

3,265

9,015

ACT English Writing

461

588

820

906

1,264

2,095

2,685

2,992

3,224

15,035

ACT Math

468

662

909

1,023

1,281

2,060

6,403

ACT Reading

479

576

965

991

1,320

2,115

6,446

ACT Science

403

528

834

777

1,105

1,764

5,411

SAT Subject 1

2,538

2,404

2,864

2,643

3,547

5,888

19,884

SAT Subject 2

2,439

2,291

2,728

2,613

3,631

6,006

19,708

SAT Critical Reading

2,549

2,498

3,138

3,054

4,237

7,475

22,951

SAT Reading Math

8,601

9,597

9,448

27,646

SAT Writing

2,645

2,631

3,162

3,050

4,248

7,199

10,267

10,950

11,241

55,393

SAT Math

1,983

1,932

2,330

2,208

2,734

4,349

15,536

Unweighted GPA

2,586

2,507

3,125

3,217

4,710

8,729

11,025

11,988

12,826

60,713

Weighted GPA†

2,025

1,813

2,155

2,352

4,111

7,468

9,024

9,148

9,461

47,557

Sources: California State Auditor’s analysis of data obtained from University of California’s (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 1: To count the number of nonresidents above, we compared the grade point averages (GPA) and test scores for each admitted nonresident to the median test scores of residents admitted to the same campus that year. If a nonresident was admitted to multiple campuses and had GPAs and test scores lower than the median GPAs and test scores at those campuses, we only counted the student once. We did not include academic year 2005–06 because the university used tests that were only applicable to that year of our audit scope.

Note 2: The absence of a nonresident count indicates that there were no scores for the test in the academic year.

* Nonresidents who had lower test scores or GPAs than the upper half of admitted residents.

† We did not include international nonresidents with lower weighted GPA scores in our count to address the university’s concern that those scores are not comparable to the scores of residents. However, if we had included these students, in academic year 2014–15 the total nonresidents with lower weighted GPAs would have been 17,533.

The University Established Financial Incentives That Led Campuses to Admit More Nonresidents

As discussed previously, many of the university’s admission decisions in recent years appear to have been significantly influenced by its desire to increase nonresident revenue. In addition to the mandatory fees—base tuition and student services fee—of $12,240 that both resident and nonresident undergraduates paid in 2015, each undergraduate nonresident paid a supplemental tuition of $24,708 for a total of about $37,000 annually. In fiscal year 2014–15, the total revenue the university generated from nonresident supplemental tuition amounted to $728 million. To maximize this revenue source, the university changed two key processes in 2008 that had the effect of incentivizing campuses to increase nonresident enrollment.

The university enacted the first key procedural change to allow campuses to retain the nonresident revenue they generated beginning with fiscal year 2007–08. Before that time, the university required campuses to return all nonresident revenue to the Office of the President for subsequent distribution among all campuses. Not surprisingly, when the Office of the President enacted this new policy, nonresident revenue began an unprecedented increase that continued into fiscal year 2014–15. Figure 7 shows the timing of the university’s 2008 procedure changes and its adoption of the “compare favorably” standard for nonresident admission in relation to its three reductions in state funding since fiscal year 2005–06.

Certain campuses gained more from this opportunity than others. In particular, Berkeley, Los Angeles, and San Diego benefited because of their pre-existing ability to attract nonresidents. For example, in fiscal year 2007–08, the Berkeley campus generated $65 million in nonresident revenue, and by fiscal year 2014–15, that amount grew to $179 million. In contrast, the Santa Cruz campus generated $10 million in nonresident revenue in fiscal year 2007–08 and $21 million in fiscal year 2014–15. As we will discuss in Chapter 3, the disparity in the amount of nonresident revenue the campuses generate has exacerbated per-student funding inequities.

The second key procedural change occurred in 2008 when the Office of the President began to set systemwide enrollment targets for residents and nonresidents. An enrollment target is the number of students that the university and its campuses endeavor to enroll each year. Following this 2008 procedural change, three of the campuses we visited began setting separate enrollment targets for nonresidents in academic year 2010–11: Los Angeles, San Diego, and Santa Barbara; and Davis began setting nonresident enrollment targets in academic year 2011–12. This time frame corresponds to the beginning of a period of rapidly increasing nonresident enrollment at the university. The campuses we visited provided us information showing that during this period, each increased its nonresident enrollment targets more rapidly than it increased its resident enrollment targets.

Those campuses acknowledged that a desire for additional revenue was part of the reason they increased their nonresident enrollment targets. For example, the San Diego campus’s new resident freshman enrollment target increased by only 10 percent from fall 2011 through fall 2014—from 3,375 to 3,700. In contrast, it increased its new nonresident freshman enrollment target by 300 percent, from 300 to 1,200.

Sources: California State Auditor’s analysis of revenue data provided by the University of California’s Office of the President generated from its Corporate Financial System and other information provided by the Office of the President.

Factors That University of California Campuses May Consider When Admitting Students

Grade point average for courses required by the University of California (university).

Scores on the SAT Reasoning Test or ACT with Writing.

Number, content, and performance in other high school academic courses.

Number and performance in university-approved honors and Advanced Placement courses.

Identification by the university that an applicant is in the top 9 percent of his or her high school class.

Quality of senior-year course schedule.

Quality of the applicant’s academic performance in relation to the opportunities available at his or her high school.

Outstanding performance in one or more academic subject areas.

Outstanding work in one or more special projects in any academic field of study.

Recent, marked improvement in academic performance.

Special talents, achievements, and awards in a particular field that demonstrate the applicant’s promise for contributing to the intellectual vitality of a campus.

Completion of special projects in the context of the applicant’s high school curriculum or school events, projects, or programs.

Academic accomplishments in light of the student’s life experiences and special circumstances.

Location of the student’s secondary school and residence.

Source: The university’s website.

As a result of establishing separate enrollment targets, the campuses were able to admit nonresidents who were less academically qualified than residents, an outcome we substantiated in the previous section. The process for evaluating applications at a campus, known as the comprehensive review, involves ranking applicants on many different factors, as listed in the text box. These factors include GPA, test scores, and life experiences. After the campus has ranked applications, it selects applicants to admit in bands based on their holistic review scores and other campus‑specific factors, such as the need to fill enrollment targets for departments and majors. When the campus has selected a sufficient number of students to meet those enrollment targets, it then admits additional applicants if needed to ensure that it meets its overall campus targets for resident and nonresident enrollment. Conceivably, a campus could meet its resident enrollment target before meeting its nonresident enrollment target. If this happened, the campus could cut off admission of residents but continue to admit nonresidents who were ranked lower than residents until the campus met its nonresident enrollment target. Two of the four campuses we visited confirmed that such an outcome was possible although they believed it was not likely.

Finally, in 2008 the university informed campuses that they would be responsible for any lost revenue should they decide to reduce their nonresident enrollment targets. Moreover, when the university adopted its funding streams initiative in 2011, which directed campuses to retain all tuition funds they generate, one of the stated goals of the initiative was to incentivize campuses to maximize revenue.

The University Has Admitted Fewer Residents to the Campuses of Their Choice and Increasing Numbers of Nonresidents Have Enrolled in the Most Popular Majors

In addition to admitting nonresidents who are less academically qualified than the upper half of admitted residents, the university also admitted fewer residents to the campuses of their choice over the past several years. Specifically, the percentage of residents to whom the university denied admission to their campuses of choice increased from 23 percent in academic year 2005–06 to 38 percent in academic year 2014–15. If residents are eligible for admission to the university and the campuses of their choice do not offer them admission, the university offers them a spot at an alternative campus through what it calls a referral process. Under this process, eligible residents not admitted to any of the campuses to which they applied are placed into a referral pool. These residents can then accept admittance to an alternate campus, which is currently limited to Merced. According to the university, the referral process is critical to its meeting its Master Plan commitment to admit the top 12.5 percent of residents. However, very few residents actually enroll at the campus to which they are referred. Conversely, the university does not refer nonresidents to alternate campuses.

From academic years 2005–06 through 2014–15, the number of residents offered admission through referral to alternate campuses increased by 79 percent—from about 6,000 to 10,700 applicants—as shown in Table 7. Of particular concern is that, over the same time period, the university’s campuses denied admission to nearly 4,300 residents whose academic scores met or exceeded all of the median scores for nonresidents whom the university admitted to the campus of their choice. Moreover, between academic years 2005–06 and 2010–11, when the university’s policy was to refer residents to both the Riverside and Merced campuses, an average of only 6 percent of those residents enrolled at the campus to which they were referred. Since academic year 2011–12, when the university began referring residents only to the Merced campus, the number of residents it placed in the referral pool increased to an average of 10,100 per year, but the average number of residents enrolling dropped to just over 2 percent, or an average of 155 enrollees per year. In comparison, when the university admitted residents to a campus to which they applied from academic years 2011–12 through 2014–15, 55 percent of residents accepted and enrolled at that campus.

Table 7
Resident Undergraduates Whom the University of California Refers to Other Campuses Rarely Enroll

Academic Year

Number of Residents Admitted to a campus to which they applied

Number of residents In the Referral Pool

Number of residents in the Referral Pool Who Enrolled

Enrollment Rate for residents in the Referral Pool

Enrollment Rate for residents Admitted to a Campus to Which They Applied

2005–06

50,614

5,981

357

6%

60%

2006–07

56,556

5,784

391

7

61

2007–08

58,549

6,606

434

7

58

2008–09

60,373

9,012

579

6

58

2009–10

57,927

11,348

706

6

57

2010–11

59,099

10,545

355

3

55

2011–12

60,136

11,940

159

1

55

2012–13

62,002

8,360

134

2

55

2013–14

62,238

9,411

131

1

55

2014–15

61,697

10,688

195

2

55

Source: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 1: Before academic year 2011–12, the university admitted nearly all of its referral pool to either the Merced or Riverside campus. Beginning in academic year 2011–12, the university only referred applicants to its Merced campus, and Merced began contacting referral applicants to confirm their interest in attending the campus before admitting them.

Note 2: The referral pool excludes residents who were referred but later admitted to a campus to which they applied. Instead, these residents are included in the column titled Number of Residents Admitted to a Campus to Which They Applied.

In addition to denying admission to the campuses of their choice to increasing numbers of residents, the university has also allowed increasing numbers of nonresidents to enroll in the most popular majors. As Table 8 illustrates, from academic year 2010–11 through 2014–15, the five most popular majors that the university offers saw significant increases in nonresident growth at Berkeley, Irvine, Los Angeles, and San Diego—between about 1,100 to 2,100 students coupled with generally declining resident enrollment—about 800 to 1,200 students in three of the four campuses. The university asserts that these enrollment changes may be the result of a mixture of student behavior, increasing nonresident applications, and evolving major offerings at the campuses. For example, the university noted that the addition of several health service majors at the Irvine campus may have resulted in decreases to campus-level enrollment in biological and life science majors.

Table 8
Changes Have Occurred in Resident and Nonresident Enrollment Growth in the Most Popular Undergraduate Majors

Residents

Nonresidents

Berkeley

Academic Year 2010–11

Academic Year 2014–15

Change in Enrollment

Percent of change

Academic Year 2010–11

Academic Year 2014–15

Change in Enrollment

Percent of Change

Biological/Life Sciences

1,479

1,295

(184)

(12)%

126

264

138

110%

Social Sciences

2,371

2,123

(248)

(10)

272

668

396

146

Engineering

2,697

2,357

(340)

(13)

603

1,077

474

79

Psychology

519

508

(11)

(2)

33

79

46

139

Business and Management

510

487

(23)

(5)

95

145

50

53

Subtotals

(806)

1,104

Irvine

Biological/Life Sciences

4,217

2,842

(1,375)

(33)%

90

158

68

76%

Social Sciences

2,881

2,759

(122)

(4)

98

350

252

257

Engineering

2,440

2,954

514

21

91

357

266

292

Psychology

1,884

1,933

49

3

50

138

88

176

Business and Management

1,690

1,438

(252)

(15)

135

575

440

326

Subtotals

(1,186)

1,114

Los Angeles

Biological/Life Sciences

4,773

5,227

454

10%

463

911

448

97%

Social Sciences

4,432

4,413

(19)

0

499

1,221

722

145

Engineering

2,486

2,045

(441)

(18)

506

647

141

28

Psychology

2,217

2,463

246

11

220

475

255

116

Business and Management

920

1,126

206

22

227

731

504

222

Subtotals

446

2,070

San Diego

Biological/Life Sciences

5,036

5,252

216

4%

215

703

488

227%

Social Sciences

3,309

2,178

(1,131)

(34)

376

824

448

119

Engineering

3,414

4,070

656

19

238

784

546

229

Psychology

1,495

966

(529)

(35)

45

155

110

244

Business and Management

765

543

(222)

(29)

77

234

157

204

Subtotals

(1,010)

1,749

Sources: California State Auditor’s analysis of data obtained from the University of California (university), Office of the President’s UC Information Center Enrollment Data Mart.

Notes: We defined the most popular majors as those with the largest total undergraduate enrollment systemwide.
We focused our analysis on campuses that had the highest percentage of undergraduate nonresidents (both domestic and international) within the last five academic years.
The resident enrollment column totals include certain students whom the university Board of Regents’ policy exempts from nonresident tuition consistent with Assembly Bill 540 (Chapter 814, Statutes of 2001).

Underrepresented Students Comprise Less Than 30 Percent of the University’s Undergraduate Student Population

The university’s recent emphasis on enrolling more nonresidents has hampered its efforts to meet its own and the Legislature’s desire that the university’s student body reflect the diversity of the State. A 1991 state law recommended that the university enroll a student body that reflected the cultural, racial, geographic, economic, and social diversity of the State. The university had issued a policy in 1988 stating a similar intention, noting its commitment to provide places for all eligible resident applicants and its desire to enroll a student body that, beyond meeting eligibility requirements, encompasses California’s broad diversity characteristics. In 1996, a constitutional amendment, Proposition 209, prohibited the university from admitting students based on a number of factors including race or ethnicity. Nonetheless, recognizing this prohibition, the university also acknowledged a need to remove barriers to the recruitment, retention, and advancement of students from underrepresented minorities.4

As shown in Table 9, since academic year 2005–06, the university has progressively increased the percentage of underrepresented minorities among the resident undergraduates that it enrolls, raising this percentage from 19 percent in academic year 2005–06, to 24 percent in academic year 2010–11, and most recently to 30 percent in academic year 2014–15. As also shown in Table 9, the percentages of underrepresented minorities for both resident and domestic nonresident graduate students grew slightly to 17 percent and 15 percent, respectively, by academic year 2014–15. The table also shows that the university’s graduate students predominantly identify their ethnicity as Asian or white.

Growth in Undergraduate Enrollment From Academic Years 2010–11 Through 2014–15

2005–06

2010–11

2014–15

UNDERGRADUATES

Residents*

African American

3%

4%

4%

(0.04)%

American Indian

1

1

1

Asian

38

39

39

Chicano/Latino

15

19

25

Other/Unknown

9

7

4

White

35

31

27

Underrepresented Minorities†

19

24

30

Nonresidents (Domestic)

African American

2%

3%

4%

80%

American Indian

1

1

1

Asian

37

41

46

Chicano/Latino

4

5

6

Other/Unknown

10

7

4

White

47

43

40

Underrepresented Minorities†

7

9

11

Nonresidents (International)

American Indian

0%

0%

0%

214%

Asian

83

87

91

Black

1

1

1

Chicano/Latino

2

1

1

Other/Unknown

7

5

3

White

8

6

4

All Undergraduates

African American

3%

4%

4%

9%

American Indian

1

1

1

Asian

39

41

44

Black

0

0

0

Chicano/Latino

14

18

22

Other/Unknown

9

6

4

White

35

31

25

Percentage of Students by Academic Year

Growth in Graduate Enrollment From Academic Years 2010–11 Through 2014–15

2005–06

2010–11

2014–15

GRADUATES

Residents*

African American

3%

3%

4%

(6)%

American Indian

1

1

1

Asian

21

21

23

Chicano/Latino

9

10

12

Other/Unknown

15

16

11

White

52

49

49

Underrepresented Minorities†

13

14

17

Nonresidents (Domestic)

African American

4%

5%

6%

18%

American Indian

1

1

1

Asian

14

16

16

Chicano/Latino

5

7

8

Other/Unknown

16

11

11

White

60

61

58

Underrepresented Minorities†

10

13

15

Nonresidents (International)

American Indian

0%

0%

0%

24%

Asian

24

33

38

Black

0

0

1

Chicano/Latino

2

3

5

Other/Unknown

69

57

47

White

5

7

10

All Graduates

African American

2%

2%

3%

4%

American Indian

1

1

1

Asian

23

24

27

Black

0

0

1

Chicano/Latino

7

8

9

Other/Unknown

22

22

19

White

45

42

40

Sources: California State Auditor’s analysis of data obtained from the University of California (university), Office of the President’s UC Information Center Enrollment Data Mart.

* Residents include certain students whom the university Board of Regents’ policy exempts from nonresident tuition consistent with Assembly Bill 540 (Chapter 814, Statutes of 2001).

† The university considers underrepresented minorities to be African Americans, Chicanos/Latinos, and American Indians.

Note 1: The other/unknown category contains both those students with unknown ethnicity and international students that the university categorized as qualifying for resident status.

Note 2: The total percentages may not equal 100 percent due to rounding.

Note 3: We did not provide separate breakdowns of Graduate Self-Supported or Medical Resident student ethnicities because the university does not distinguish the residency status of students enrolled in those programs. However, we included students enrolled in both programs in the All Graduates table above.

The university’s effort to increase the enrollment of underrepresented minorities among resident students is commendable, but the university’s overall undergraduate student body does not yet encompass the State’s diversity characteristics. According to statistics from the Department of Finance, underrepresented minorities comprised 45 percent of California’s population in 2014. Despite raising California undergraduate enrollment of underrepresented minorities to 30 percent in academic year 2014–15, the university needs to make additional progress to raise the level of underrepresented minorities enrolled to mirror the 45 percent of the State’s overall population.

However, the university’s emphasis on enrolling increasing numbers of nonresidents has hampered its efforts to enroll more underrepresented minorities because only 11 percent of enrolled nonresident domestic undergraduate students were from underrepresented minorities as shown in Table 9. In fact, as of academic year 2014–15, roughly 86 percent of undergraduate domestic nonresident students identified their ethnicity as Asian or white. The university has more than tripled its population of undergraduate nonresidents since academic year 2005–06, resulting in underrepresented minorities comprising less than 30 percent of the university’s total undergraduate population. According to the university, its goal for resident undergraduates is to reflect the diversity of the State, while it seeks to increase geographic diversity by enrolling nonresidents. Although nonresidents bring geographic diversity to the university’s overall student population, increasing the number of nonresidents has slowed its progress in aligning the university’s percentages of underrepresented minorities with those of the State’s percentages.

Furthermore, in academic year 2005–06, the university denied admission to the campus of their choice to about 23 percent of undergraduate residents who applied, and by academic year 2014–15, that percentage had grown to 38. As shown in Figure 8, the university increasingly denied admission to residents of all ethnicities. Figure 8 also shows the increasing trend in resident applications, which contributed to the increasing rates of denial. Although the university cannot consider race or ethnicity when making admissions decisions, the university continues to deny admission to underrepresented minorities at higher rates than residents who identify their ethnicity as Asian or white. In particular, in academic year 2014–15, the university denied admission to 47 percent of underrepresented minority applicants, and to 32 percent of applicants who identified their ethnicity as Asian or white.

Figure 8
Ethnicities of Resident Undergraduates Who Were Denied Admission to the Campuses of Their Choice

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Undergraduate Admissions System and other operational data.

Note 1: The university considers underrepresented minorities to be African Americans, Chicanos/Latinos, and American Indians.

Note 2: Some students to whom the university denied admission to the campuses of their choice ultimately enrolled at an alternate referral campus, as shown in Table 7.

Moreover, many of the underrepresented minorities to whom the university denied admission to the campus of their choice might have been qualified to attend the campus to which they applied. Specifically, as noted earlier in this chapter, the university’s campuses denied admission to nearly 4,300 residents from academic years 2005–06 through 2014–15 whose academic scores met or exceeded the median scores of admitted nonresidents on every academic indicator we evaluated. More than 450 of those were resident underrepresented minorities. This number suggests that the university denied admission to more than 450 underrepresented minorities—364 of those in the last three academic years—who were at least as academically qualified as certain admitted nonresidents.

The University Has Not Sufficiently Justified Resident Tuition Increases

Over the past 10 years, the university has repeatedly increased the cost of tuition without sufficient justification and to the detriment of California families. Since academic year 2005–06, the university has increased mandatory fees—base tuition and the student services fee—for residents six times and at varying rates resulting in an overall increase of 99 percent, from $6,141 in academic year 2005–06 to $12,240 in academic year 2015–16, as shown in Figure 9. Over the same time frame, median household income in California decreased by nearly 4 percent, from more than $62,700 in 2005 to $60,500 in 2014. This income decrease, coupled with the unpredictable timing and amount of tuition increases, has likely made it difficult for families to effectively budget for this important investment.

We expected the university to have based any tuition increases on its actual cost of instruction; however, according to the university’s associate vice president of budget analysis and planning (budget associate vice president), the university does not base tuition on the cost of instruction. Instead, it uses a model to estimate its future budget needs and expected revenue, then increases tuition to fill any estimated revenue gap. She explained that the university looks at how proposed tuition levels will compare with other public institutions to determine whether an increase is justified.

In fact, even though it is required, the university has not conducted a usable study to determine the costs of educating its students, thereby limiting its ability to appropriately justify tuition increases. The Legislature required the university to submit a report every two years beginning in 2014 on the total costs of education at the university, disaggregated by academic discipline. In the report issued in 2015, the university took issue with the methodology the Legislature requested and instead provided a range of costs, one based on what it called the Legislature’s “narrow definition” and a broader definition it considered more complete. However, the university cautioned that decision makers should not use the report as a solid rationale for making policy decisions or allocating resources because the assumptions, estimates, and proxies for data it had used to calculate the costs it reported could result in unreliable estimates.

Figure 9
The University of California Has Significantly Increased Undergraduate Mandatory Fees

Source: The University of California 2015–16 Budget for Current Operations.

The university’s cost study is problematic because the source of the data it uses is not apparent, and it does not tie the costs and funding it reported to readily available and public financial data, such as its audited annual financial report. By contrast, the National Association of College and University Business Officers (national association) developed a cost model for universities to clearly outline the annual costs of education based on either the indirect cost rate study they prepare for the federal government or their audited financial statements, both of which are verified and readily available sources of financial information. The university chose not to use the national association model because it disagreed with some of its assumptions. Despite the university’s reluctance to produce a cost study because it disagrees with the prescribed methodology or because it believes the underlying cost accounting data for a detailed cost study are difficult and expensive to obtain, the university should develop a reasonable, well-supported methodology and use it as the basis for funding requests and tuition increases.

In addition to the methodology the national association created, other public university systems have developed thorough cost studies which decision makers can assess when considering tuition increases or funding requests, suggesting that such an approach is both feasible and beneficial. For instance, Texas uses actual expenditures to calculate the relative educational costs per student academic level and discipline. Every two years, the Texas state legislature uses this cost study to make funding decisions. According to the university, the cost study approach used by other states—primarily Texas—is overly complex. However, our review found that the process Texas employs is relatively straightforward because it uses operating cost elements that campuses report in their annual financial statements and enrollment data. Furthermore, the University of Texas at Austin, one of the schools within the University of Texas system, uses the results of its state’s cost study as one of the main factors—along with tuition rates that other universities charge, its projected cost increases, and its priorities—to determine the tuition it charges students.

By performing a cost study, the university could find, for example, that the amount it actually costs to educate students could justify its need to increase—or decrease—the amount it charges for tuition. An accurate calculation of costs also could serve as a foundation that the Legislature and the university could use to determine reasonable levels of financial support from both the State and from students.

Legislative Intervention Could Help to Ensure That the University Meets Its Commitment to Residents

The university’s decision to increase nonresident enrollment at the expense of residents will have a long‑lasting impact unless the Legislature and the university take steps to restore the university’s historic commitment to residents. These steps must not only ensure that the university prioritizes residents’ interests in the future but also repairs the damage that its past decisions have caused. In November 2015—during the course of our audit—the university committed to enrolling an additional 10,000 more residents over the next three fiscal years. However, the enrollment of 10,000 additional residents will not fully rectify the ramifications of its decision to admit nonresidents while referring or denying admission to more qualified resident applicants.

Based on the university’s assertion that it increased nonresident enrollment because of decreases in state funding and rising costs, we would have expected it to decrease—or at least hold constant—its nonresident enrollment when state funding began to increase. Instead, as previously shown in Figure 3, state funding has been increasing steadily since fiscal year 2012–13. However, the university has acknowledged that it intends to continue to admit increasing numbers of nonresidents, and in its 2016–17 operating budget, the university indicated that nonresident revenue continues to be a key part of its financial plan. Thus, until the university’s financial incentive to enroll nonresidents is mitigated, it will likely continue to admit increasing numbers of nonresidents.

The university’s 2010 Commission on the Future report acknowledged the potential benefits and challenges of increasing nonresident enrollment. This report asserted that the university had low proportions of nonresident undergraduates compared to other public and private research universities and recommended that it increase nonresident enrollment to 10 percent. Such an increase, the report stated, would generate additional revenue to sustain current instructional capacity and educational offerings for all undergraduates. Further, the report stated that increasing the number and proportion of nonresidents would enhance undergraduates’ educational experience, broaden geographical diversity, and prepare students for a global society.

However, the report cautioned that campuses must establish targets for nonresident enrollment that do not displace funded enrollment of California residents and that the admission of nonresident undergraduates should not displace funded California residents who are eligible for admission. The report indicated that the university should cap this increase in nonresident enrollment at 10 percent, and it should also consider creating a systemwide referral pool for nonresidents and determining the areas to which each campus should dedicate the revenue from increased nonresident enrollment. However, the university has not taken these actions. Instead, total nonresident undergraduate enrollment stands at 13.4 percent for academic year 2014–15; the university does not put nonresidents in the referral pool; and the Office of the President has not given campuses specific direction on how to dedicate the increased revenue from nonresident enrollment.

We believe that the Legislature should consider amending state law to limit nonresident undergraduate enrollment at the university, which would ensure that the university does not displace residents. For example, between academic years 2005–06 and 2007–08, before the drop in state funding, nonresidents comprised about 5 percent of the university’s new undergraduate enrollment.5 By academic year 2014–15, that percentage had climbed to more than 17 percent, which translated to 7,200 new nonresident undergraduates above a 5 percent limit on new nonresident enrollment. Decreasing new nonresident enrollment by 7,200 would make the same number of spots available for residents to maintain the 5 percent limit of new nonresident undergraduates to new resident undergraduates.

Requiring the university to enroll significantly more resident undergraduates would require an additional financial commitment from both the university and the State. As we show in Table 10, different enrollment limits on new nonresident enrollment with a corresponding increase in resident enrollment would require additional revenue, which either the university or the State—or both—would need to provide. For example, if the university’s total expenditures remained constant and it increased enrollment by 7,200 residents to correspond to the 5 percent limit on new nonresident undergraduate enrollment, the university would require additional revenue of $72 million, or $10,000 per student—the amount that the university asserts it would need to fund resident enrollment growth.

If the Legislature were also to commit additional funds to the university for meeting an agreed-upon enrollment percentage, it could do so using a phased-in approach. For example, the Legislature could require the university to achieve a 5 percent limit on overall nonresident undergraduate enrollment within four years and it could provide the university with incremental increases in appropriations each year until the university reached that target. For example, year one would require a $72 million additional investment over the fiscal year 2014–15 baseline appropriation. Similarly, following the recommendation in the university’s Commission on the Future report, if the cap on nonresident enrollment was set at 10 percent, year one would require $42 million in funding. As we discuss later in this report, we believe the university could also generate additional savings internally, which could help it compensate for the lost nonresident revenue.

Finally, even though the university asserts that enrolling more nonresidents has not precluded it from meeting its Master Plan commitment to select from the highest achieving students in the State—the top 12.5 percent of all California high school graduates—the university’s admission decisions call into question whether it has actually met this commitment. As we discussed earlier in this chapter, few residents accept the university’s referrals to the Merced campus; nonetheless, the university identifies its referral process as playing a major role in fulfilling the goals of the Master Plan. According to the university, it estimated admitting the top 14.9 percent of the eligible California high school graduating class in academic year 2014–15, which includes residents in the referral pool. If we exclude the residents the university placed in the referral pool and who did not ultimately enroll at the referral campus, the university would have admitted 12.4 percent of the eligible California high school graduating class—less than the 12.5 percent Master Plan commitment. Because placements in the referral pool result in significantly fewer enrollments of residents than do admissions to a campus to which a resident applied, we question whether the university should include referral admissions when computing its admission of the top 12.5 percent of California high school graduates. To remedy this problem, the Legislature should consider requiring that the university exclude placements in the referral pool when determining whether it meets the Master Plan tenet to admit the top 12.5 percent of high school graduates until more residents actually enroll at the referral campus.

Desired Number of New Annual Nonresident Enrollments (using academic year 2014–15 new enrollment)

Change from Actual Academic Year 2014–15 Nonresident New Enrollment to Desired

Additional Funding needed to enroll corresponding number of residents at $10,000 per student (in millions)

Total Nonresident Enrollment Percentage

Total Enrolled Undergraduate Nonresidents at that Percentage (using academic year 2014–15 enrollment)

5%

2,940

(7,158)

$72

A limit on new nonresident enrollment would achieve a corresponding limit on overall nonresident undergraduate enrollment after four years

5%

9,754

10

5,880

(4,218)

42

10

19,508

15

8,820

(1,278)

13

13.4

26,200*

17

10,098†

–

–

15

29,262

20

11,760

1,662

–

20

39,016

Sources: California State Auditor analysis of fiscal year 2014–15 admission and enrollment data obtained from the University of California (university) Office of the President’s University Undergraduate Admissions System and other operational data, University UC Information Center Enrollment Data Mart, the university’s Information Center, and the university’s 2015–16 Budget for Current Operations.

Note: New undergraduate enrollment includes incoming freshman and transfer students.

* This is the actual nonresident enrollment total for academic year 2014–15 as of the third week of the fall term.

† This is the actual new nonresident enrollment total for academic year 2014–15.

Recommendations

To meet its commitment to California residents, the university should do the following:

Replace its “compare favorably” policy with a new admission standard for nonresident applicants that reflects the intent of the Master Plan. The admission standard should require campuses to admit only nonresidents with admissions credentials that place them in the upper half of the residents it admits.

Amend its referral process by taking steps to increase the likelihood that referred residents ultimately enroll.

To ensure that campuses’ interpretations of admission standards do not adversely impact residents, the university should implement a thorough process to annually evaluate the qualifications of students who apply and students who are admitted. These evaluations should highlight instances when campuses admit nonresidents who are less qualified than residents and should include corrective action steps. Moreover, this evaluation should include resident and nonresident undergraduate enrollment in majors at each campus. The university should make the results of this evaluation—including details of the academic qualifications of students who applied and who were admitted—publicly available.

To ensure that it has accurate information upon which to make funding decisions, the Legislature should consider amending the state law that requires the university to prepare a biennial cost study. The amendment should include requirements for the university to differentiate costs by student academic level and discipline and to base the amounts it reports on publicly available financial information. In the absence of legislative action, the university should conduct a cost study every three to five years and ensure that it is based upon publicly-available financial information. The university should use the results of the cost studies as a basis for the tuition it charges and for the proposed funding needs that it presents to the Legislature.

To ensure that the university does not base future admission decisions on the revenue that students generate, the Legislature should consider amending state law to limit the percentage of nonresidents that the university can enroll. For example, the Legislature could require that the university limit nonresident enrollment to 5 percent of total undergraduate enrollment. To accomplish this, the Legislature should consider requiring that the university’s annual appropriations be based on enrolling agreed‑upon percentages of residents and nonresidents.

To ensure that the university meets its commitment to residents and to bring transparency and accountability to admission outcomes, the Legislature should consider excluding the students who the university places in the referral pool and who do not ultimately enroll at the referral campus when calculating the university’s Master Plan admission rate until the percentage of students who enroll through the referral process more closely aligns with that of the other campuses.

Chapter 2

The University of California Did Not Sufficiently Reduce Its Costs Before Increasing Tuition and Nonresident Enrollment

Chapter Summary

Before it increased its tuition and nonresident enrollment to address its funding shortfalls, the University of California (university) could have done more to improve its operational efficiencies and reduce costs. For example, when the Legislature required the university to enroll an additional 5,000 residents in academic year 2016–17 as a stipulation of receiving $25 million in state funds, an action the university estimates will cost approximately $50 million, or $10,000 per student, the university indicated it would use other funding sources to cover the remaining $25 million. The university indicated that it would make these funds available primarily by eliminating financial aid for nonresidents. Since the university can shift its expenditures for the purpose of enrolling additional residents, we believe that it has significant opportunities to replicate this effort.

For example, despite the State’s fiscal crisis, the university increased its spending on employee salaries in eight of the last nine fiscal years. Furthermore, the university pays its top executives salaries that are significantly higher than those the State pays its employees in high-level positions in the executive branch. In fiscal year 2009–10, the university implemented a one-year salary reduction and furlough plan (furlough plan) for faculty and staff, saving an estimated $236 million. If the university had continued this furlough plan at a reduced level, it could have saved an additional $100 million dollars per fiscal year. The university also could improve its executive compensation practices by conducting regular compensation and benefits studies, by addressing recommendations its internal auditor made in 2013 regarding salary-setting practices, and by producing its annual executive compensation report in a timely manner.

Moreover, the university has not maximized the benefits that it could have achieved from an initiative it developed in 2010 called Working Smarter. The Working Smarter initiative’s goal was to redirect the savings generated and the new revenue sources developed to the university’s core academic and research missions. Although the university asserts that it generated $664 million in combined savings and new revenue over the past five years, it could not substantiate this amount or demonstrate that the entire amount was redirected to its academic and research missions. Further, the university does not centrally direct the savings or new revenue the campuses generate or require that campuses participate in the initiative. The university estimates that if it had achieved a campus participation rate of 80 percent for one program alone, it would have generated $9 million of additional savings.

Finally, the university’s nonresident undergraduate recruiting expenditures have increased—from $900,000 in fiscal year 2010–11 to $4.5 million in 2014–15. If the university had done more to limit its nonresident recruiting expenditures, this would have resulted in additional savings from fiscal years 2010–11 through 2014–15.

During the State’s Fiscal Crisis, the University Significantly Increased Its Spending on Employee Costs

As we discuss in the Introduction, the State’s 2008 fiscal crisis resulted in a series of significant cuts to the university’s state appropriations. We expected that the university would have reviewed the efficiency of its internal operations and expenditures in response to these cuts to ensure its ability to continue to provide residents with a high‑quality, low-cost education. Instead, the university increased its staff who belong to one or more of the personnel programs described in Table 11, and it increased spending on salaries in eight of the last nine fiscal years. Additionally, during the past 10 fiscal years, the university increased mandatory fees for residents—base tuition and the student services fee—six times, and increased total nonresident enrollment by 118 percent.

From fiscal year 2005–06 to 2014–15, the gross earnings of the university’s employees systemwide increased 64 percent, from nearly $8 billion a year to nearly $13 billion a year. During that time, the number of university employees and gross earnings increased within each personnel program except the senior management group, as depicted in Table 11. Although the senior management group experienced a reduction of 133 employees, or 40 percent, its gross earnings only decreased by 4 percent during the 10 years, indicating that the average gross earnings of employees in this group also increased. Further, the reduction in the number of employees occurred not because the university reduced the number of senior managers, rather because it reclassified and transferred approximately 100 deans from the senior management group program into the academic personnel program. The managers and senior professionals personnel program experienced the largest increase in employees at 51 percent, or an increase of 4,408 employees, accompanied by a more than $765 million increase in gross earnings, or 104 percent.

Table 11
The Number of University of California Employees and Their Gross Earnings Increased Significantly From Fiscal Years 2005–06 Through 2014–15

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Corporate Data Warehouse and Decision Support System. The summaries contain payroll transactions, reported as of September 30, 2015.

Note: This table includes all of the university’s staff at each campus, the Office of the President, and medical centers. Dollars are rounded to the nearest hundred thousand.

* Employee counts are based on employees rather than positions, which includes both full- and part-time employees. Also, an employee may be counted more than once if the employee moved from one personnel program to another during the year or held more than one position concurrently.

† The reduction in the number of senior management group employees occurred because the university reclassified and transferred approximately 100 deans from the senior management group into the academic personnel program.

‡ Total exceeds 100 percent due to rounding.

The only fiscal year in which the university decreased its spending on employee salaries was in fiscal year 2009–10, when it implemented a furlough plan for faculty and staff from September 2009 to August 2010.The university estimated that this plan, in which it furloughed employees for 10 to 26 days during those 11 months, saved $236 million from all funding sources. However, in the following year, it negated this one-time cost savings from the furlough plan when it increased its spending on employee salaries by $526 million. Had it continued its furlough plan, the university could have achieved additional savings to offset its loss of state funding. For example, had it continued the furlough program at even less than half the fiscal year 2009–10 savings rate, it could have saved an additional $100 million per fiscal year. Instead, the university’s expenditures for employee salaries continued to increase in each of the fiscal years after the furlough plan ended, for a total of $3.1 billion. In a 2015 analysis of its employee costs, the university attributed 60 percent of its growth in employees from 2007 to 2014 to health science employees, who are paid from other funds besides the State’s General Fund and tuition and fees. It attributed the remaining 40 percent in employee growth to the campuses and the Office of the President, split about evenly between university staff and student workers. However, the university’s analysis does not address the increased cost associated with its employment growth. Although the university indicated that it reduced the number of employees it paid from state funds, the university also increased the number of employees it paid from other funds such as tuition and fees, indicating that the fund sources with which it uses to pay its employees changed.

The University Provides Salaries and Benefits That Significantly Exceed the Compensation of Other High-Level State Positions

In addition to increasing its total number of staff and their gross earnings during the State’s fiscal crisis, the university also paid salaries to its executives that significantly exceeded the amounts earned by employees in high-level state executive branch positions. As shown in Table 12, the salaries of the university’s top executives—including the president, four officers of the Regents of the University of California (regents), and the 10 campus chancellors—significantly exceeded those of employees in high‑level executive branch positions. The university paid all but one of its executives in these positions a base salary of at least $400,000 in fiscal year 2014–15, which was more than double the amount the executive branch paid the governor and the directors of several large state departments. Additionally, all university positions exceeded the salary level of the executive branch’s highest career executive assignment (CEA). CEAs at this level include directors of small departments, chief deputy directors of large departments, or positions with specialized skills within the executive branch. Effective June 2015, state law requires the university to revise its existing process for establishing the salary ranges for its top executives, specifically those in the senior management group, so that its process includes, at a minimum, comparable positions in state government.

Table 12
The University of California’s Top Executives Earn More Than High-Level Positions in the State’s Executive Branch

Entity

Position

Fiscal Year 2014–15 Base Salary Earned*

University of California

Chief Investment Officer and Vice President of Investments†

$615,000

University of California

Chancellor, San Francisco

579,825

University of California

President

570,000

University of California

General Counsel and Vice President for Legal Affairs†

428,480

University of California

Senior Vice President - Chief Compliance and Audit Officer†

417,150

California State Teachers’ Retirement System

Chief Investment Officer

415,377

California Public Employees’ Retirement System

Chief Investment Officer

406,785

University of California

Chancellors, average of remaining nine campuses‡

404,313

California Department of Corrections and Rehabilitation

Agency Secretary

233,611

California Department of Public Health

Director

225,078

University of California

Secretary and Chief of Staff to the Regents†

225,000

California State Teachers’ Retirement System

General Counsel

224,196

California Department of Finance

Director

178,111

Top allowable executive branch career executive assignment (CEA) salary
for positions requiring licensure as a physician, attorney, or engineer

$172,908

State of California

Governor

169,559

California Department of Water Resources

Director

168,890

California Department of Education

Superintendent of Public Instruction

152,998

California Department of General Services

Director

150,277

California Department of Consumer Affairs

Director

136,496

Top allowable CEA Level C salary

$135,948

California State Controller’s Office

Controller

134,325

Sources: California State Auditor’s analysis of data obtained from the University of California (university) Office of the President’s Corporate Data Warehouse and Decision Support System. The data contain payroll transactions reported as of September 30, 2015. State employee data are from the California State Controller’s Office website.

Note: All university positions listed in the table had additional cash earnings during fiscal year 2014–15, which were excluded from the table. The base salary for the chancellor of the San Francisco campus excludes amounts paid by endowment funding.

* State employee salaries were for 2014, with the exception of the Director of the California Department of General Services and the General Counsel of the California State Teachers’ Retirement System, whose salaries are from 2013.

† The university refers to these four positions as its principal officers of the Regents of the University of California.

‡ Excluding the San Francisco campus, the salaries of the chancellors of the other nine campuses ranged from $369,000 to $501,000. The chancellor for the Irvine campus served in his position for part of the fiscal year.

We reviewed the university’s progress toward this state requirement and found that as of February 2016 it matched 32 of its 92 total senior management group positions to positions existing within state government, the California State University, and local governments. The university indicates it was unable to identify comparable positions for the remaining 60 positions because it either found no comparable positions at these entities or needed more time to assess the comparability of the positions. Of the 32 comparable positions it found, the university only matched 23 to positions in state government. The university intends to present this analysis to the regents in March 2016 for approval. If approved, 60 of the university’s salary ranges for its senior management positions will not include comparable positions from the State, local governments, or California State University. As such, the university’s analysis is limited and more work is needed to identify additional positions at these entities for inclusion in its salary ranges.

In addition to salaries that exceed those of employees in high-level executive branch positions, the university provides certain generous benefits to its president and chancellors. Specifically, the university makes contributions to the retirement savings plans of senior management group employees with full-time, nontenured academic appointments at the rate of 3 to 5 percent of their monthly base salaries. For instance, the president of the university earned a base salary of $570,000 in fiscal year 2014–15. Because she receives the retirement plan benefit at 5 percent, the university contributed $28,500 that year to her elected retirement savings plan. This retirement benefit is in addition to the university’s regular pension plan, to which it contributes 14 percent and employees contribute 8 percent of their gross pay.

Additionally, while the salaries of the university’s top executives ranked below those at similar research institutions, the comparative data did not include all elements of compensation for the participating university executives. Specifically, using The Chronicle of Higher Education’s annual survey of chief executive compensation at public and private universities (Chronicle survey), we found that the salaries of the university’s president and chancellors in fiscal year 2013–14 ranked in the bottom half when compared to similar positions at peer research institutions.6 These peer institutions are members of the Association of American Universities, an organization composed of 62 leading public and private research universities located throughout the United States and Canada. According to the Chronicle survey and our additional analysis of the university’s payroll data, the salaries of the university’s chancellors fell among the lower third of its public and private peer institutions in fiscal year 2013–14, while the president of the university ranked above the middle, placing 10th out of 28 public universities that participated in the survey. The university reported that all but one of its chancellors’ annualized base salaries for 2014 had increased by $12,000 to $93,000, while the president’s base salary remained unchanged.7

Examples of Benefits the University Commonly Offers Its President and Chancellors

Monthly contribution ranging from 3 to 5 percent of the employee’s base salary to one of three types of retirement savings plans, only if the employee does not have an underlying faculty appointment.

Accrual of sabbatical leave credit if the employee has an underlying faculty appointment.

Executive life insurance up to two times the employee’s annual base salary to a maximum of $800,000.

University-provided housing.

Monthly cash automobile allowance for university business use of a privately-owned vehicle.

Eligibility for a low-interest home loan upon leaving the position if the employee assumes a tenured position at a university campus.

Relocation of personal belongings to a California location of the employee’s choice when the employee leaves the position if the employee continues employment at the university.

Sources: California State Auditor’s analysis of compensation packages and University of California compensation policy.

Although the salaries of the university president and chancellors generally lagged behind those paid by comparable public universities, the Chronicle survey did not report the total value of the public universities’ compensation packages. Specifically, it excluded benefits and other noncash elements of compensation for executives of public universities, which may or may not be similar to what the university provides. Examples of other benefits are shown in the text box.

The University Needs to Take Additional Steps to Justify Its Salaries and Benefits

The university could do more to justify the salaries and benefits it provides to its employees. Specifically, it has not conducted regular compensation and benefit studies that would enable it to assess the reasonableness of its executive compensation. Further, it has failed to address its own internal recommendations related to improving its executive compensation practices. Finally, it has not produced timely reports that would increase transparency regarding the salaries and benefits it offers to its top executives and senior managers.

The university has not been proactive in assessing the total value of benefits it provides to its top executives and managers. In 2009, a university consultant performed an analysis to value the competitiveness of certain elements of the university’s executive compensation packages by comparing its base salaries, health and welfare benefits (health benefits), and retirement with those offered by 26 public and private universities, 12 national academic medical centers, and 10 California medical providers. The consultant found the base salaries of employees in its senior management program and its managers and senior professionals program lagged behind the market by 22 and 16 percent, respectively. However, when the consultant added the total value of the university’s health benefits and retirement, the compensation disparity was reduced to approximately 14 percent below market for the senior management group and 4 percent below market for managers and senior professionals.

This consultant study—which did not include other perquisites that the university provides including housing, stipends, honorariums, bonuses, lump sum awards, and automobile allowances—demonstrates that although base salaries for the university’s top executives and managers were generally lower than the market in 2009, the additional value of its health benefits and retirement brings its compensation packages for the university’s top executives and managers closer in line with other comparable universities and industries included in the consultant’s study. However, this study was conducted more than six years ago, calling into question whether it accurately reflects the university’s current compensation practices and the value of its executive compensation packages. To ensure that the university considers all compensation that its executive and management staff receive, to the extent possible, any future study should not only include the value of the base salaries, health benefits, and retirement but also all forms of compensation and perquisites that the university provides.

Further, the university has yet to implement five recommendations from a February 2013 internal review by its internal audit unit (internal review) of its process for establishing salary ranges for its senior management group (senior management) employees. The objectives of the internal review were to identify opportunities to improve the university’s methodology for establishing salary ranges for senior management employees and validate that the ranges align with survey data. The university uses salary ranges as a basis to hire, offer salary adjustments, and monitor the compensation of its top executives. To establish the reasonableness of its salary ranges, the university compiles national salary information from comparable positions at participating universities and industries using predefined criteria, such as job functions and characteristics. The five recommendations still outstanding from the internal review advised the university to establish a variety of procedures and limits for creating, adjusting, and reviewing salary ranges. According to the university, it has not implemented these recommendations because of time and resource constraints, but it is in the process of addressing them by August 2016. By failing to implement these recommendations promptly, the university has delayed an opportunity to improve its compensation practices and ensure that its methodology for establishing the salary ranges for its top executives is reasonable.

The university could also be more transparent in reporting executive compensation. Specifically, the Budget Act of 2006 requested that the university provide an annual report on executive compensation to the California Department of Finance and several legislative committees by March 1 of each year through fiscal year 2010–11. However, the university missed this deadline in four of the five fiscal years, and it was unable to demonstrate that it produced this report at all in fiscal year 2007–08. In addition, the university currently publishes an annual report on executive compensation that provides the salaries and benefits it pays to certain of its highly compensated employees. The regents’ bylaws require the university to submit this report by July each year, covering the previous calendar year. However, the university did not submit its report for calendar year 2014 compensation until December 2015, nearly 6 months after the required submission date. The university told us that it was late in submitting the report because of staff constraints, competing priorities, and the need to resolve two discrepancies it found while validating the compensation information. Nevertheless, by not promptly submitting the 2014 report, the university denied the regents and the public timely information that would allow them to scrutinize the pay of highly compensated university staff.

The University Has Lent a Significant Amount of Funds to a Home Loan Program for the Benefit of Its Faculty and Senior Managers

The university uses the University of California Home Loan Program Corporation (home loan program) to recruit and retain certain university faculty and senior managers by providing them with home loans for the purchase of principal residences near their campus. The home loan program offers a number of advantages to employees, including no lender fees, private mortgage insurance requirements, or impound accounts; interest rates that are competitive with market rates; and the requirement for a down payment of only 10 percent on loans that are $1.3 million or less. As of June 2015, the home loan program reports a portfolio of 3,048 loans, with an outstanding balance of $1.27 billion.

Although the home loan program indicates that it is self-supporting, the university and campuses lend it the money that funds the home loans. As of June 2015, the university owned 602 of the 3,048 loans at a value of $252.1 million. The university sold the remainder of the loans to outside investors, but it still services those loans. Since 1985, the university has provided funding to the home loan program from its short-term investment pool, a highly liquid portfolio of investments that the university uses to fund its day-to-day operations. The home loan program compensates the university for the loans at a monthly rate of return that is tied to the current earnings of the short-term investment pool, which was 1.28 percent on June 30, 2015.

However, because the home loan program is financially dependent on the university, it ties up a substantial amount of funds in a long‑term investment that the university could otherwise use elsewhere. According to the university, it considers the funds it lends to the home loan program as an investment of the short‑term investment pool, which, it indicated, the regents approved as an exception to this pool’s normal uses. The university compared the average annual rate of return for the home loan program’s loans—2.61 percent—with the short‑term investment pool’s gross rate of return of 1.5 percent for fiscal year 2014–15 and cited excess earnings of about $1.9 million. However, the university is comparing a long‑term home loan investment rate of return with that of its short‑term investment pool. The mortgage loans it issues may have a term of up to 40 years, while the short-term pool contains investments with a maximum maturity of 5.5 years. A more accurate comparison to assess the opportunity costs of investing in the home loan program would be to compare it to the rate of return of its intermediate-term investment pool.

According to the university, the intermediate-term investment pool had an annualized net return of 8.6 percent over the past five years, more than four times greater than the short-term investment pool’s five-year net return of 2 percent. Had the university invested its $252.1 million in outstanding home loan balances at the intermediate-term investment portfolio’s annualized five-year rate of return at 8.6 percent, the university could have generated nearly $21.7 million. Although the university believes the home loan program is beneficial for the recruitment and retention of certain faculty and senior managers, it needs to consider whether the low return on its investment is worth the cost.

Goals of the University of California’s Working Smarter Initiative

Redirect $500 million from administrative costs to academic and research missions within five years.

Streamline operations to address state funding cuts and the need for commonality among the campuses.

Implement operational efficiencies that enhance the quality of services provided to students, faculty, and staff.

Build a sustainable financial model to carry forward.

Source: University of California’s Working Smarter website.

The University Could Not Substantiate the Savings or New Revenue Generated From the Working Smarter Initiative

The university has reported that it met the goals of an initiative it developed to redirect more than $500 million in savings resulting from administrative efficiencies and new revenue sources to the university’s core academic and research missions. However, our review found that the university could not substantiate that the savings or new revenue it claims to have generated actually occurred. In 2010, in response to a regents’ policy, the university formalized an initiative called Working Smarter—described in the text box—to identify new revenue and to reduce its administrative costs by increasing systemwide efficiency. The Working Smarter initiative includes 34 projects. The university has reported that 13 of these projects generated $664 million in combined savings and new revenue over the past four years and that the Office of the President passed most of these funds to the campuses to pay for academics and research. We show the 13 projects and their reported savings and revenue in Table 13.

Table 13
The University of California Has Claimed Significant Savings From Working Smarter Initiative Projects

Project Name

Description

Savings or Revenue Reported (in Millions)

Projects With Proceeds That Directly Contributed to Academics and Research

Liquidity Management

Optimizes the allocation of campus working capital between the University of California's (university) Short Term Investment Pool and its longer-term Total Return Investment Pool.

$130.4

Parent Giving

Places increased emphasis on donations from parents of university students.

44.5

Purchase Card Program

Uses electronic payments to reduce administrative costs.

21.9

Subtotal

$196.8

Projects With Proceeds That Indirectly Contributed to Academics and Research

Provides a systemwide management tool to manage and plan for scheduled preventative and unscheduled emergency maintenance.

2.7

Travel Insurance Program

Provides lower-cost and higher quality travel insurance as well as access to travel assistance resources.

2.6

Subtotal

$467.0

Total savings and revenue reported

$663.8

Sources: California State Auditor’s analysis of the university’s Working Smarter Initiative website, its 2015–16 Budget for Current Operations, and the Office of the President’s November 19, 2014 progress report on the Working Smarter initiative.

We attempted to validate the savings or new revenue the university reported for these 13 projects but the Office of the President could not provide information to substantiate these amounts. According to the director of the Working Smarter initiative (initiative director), she determines the savings and revenue amounts from either summary or detailed information that each project reports to her. However, the information that she was able to provide us was not supported by financial documents to allow us to confirm the accuracy of the savings or revenue that the university claimed.

In addition, even though the university publicly claimed that it redirected most of the administrative savings it achieved or the new revenue it generated from the Working Smarter initiative to its academic and research missions, the university cannot fully substantiate this claim. According to the initiative director, the university encouraged participation in the initiative by allowing any campus or Office of the President department that generated savings or revenue to retain those funds for all projects except five: Liquidity Management, Parent Giving, Purchase Card, Enterprise Risk Management, and Statewide Energy Partnership. For the first three of these projects, the university indicated that it redirected the proceeds to its academic and research missions by applying them to the university’s budget. For the other two projects, the university reinvested the savings back into the projects.

When we asked three campuses to demonstrate through financial records that they redirected savings or new revenue generated by the remaining eight projects from an administrative use to an academic or research use, none could do so. Instead, each campus explained that the efficiencies that their departments gained from the additional revenue indirectly enhanced the university’s academic and research missions in immeasurable ways. As a result, the savings and new revenue generated through the remaining eight projects along with the Enterprise Risk Management and Statewide Energy Partnership—which totaled a combined $467 million of the $664 million total—were not redirected to the university’s academic and research missions but instead, according to the initiative director, indirectly benefited students. Thus, although the university may be generating cost savings and additional revenue through Working Smarter initiative projects, we question whether it met the goal of redirecting $500 million from administrative costs to academic and research missions.

Moreover, although allowing the department that generated the savings or new revenue to keep those funds may create more support for the Working Smarter initiative, this practice does not allow the university to centrally and effectively manage the new savings and revenue to put towards the university’s academic and research missions. The initiative director indicated that the nature of three of the projects—Liquidity Management, Parent Giving, and Purchase Card—allowed for central management of the savings and new revenue they generated. Ultimately, the university should not have included proceeds from projects that did not directly contribute to its core academic and research missions toward its measure of meeting the goal to redirect $500 million from administrative costs to its academic and research missions.

Further, the Office of the President did not follow the regents’ direction that it obtain full participation by all campuses in the Working Smarter initiative and that it only allow campuses to opt out if they demonstrate that participating would result in materially higher costs or less functionality. According to the initiative director, the Office of the President believed that the Working Smarter initiative would have better results if the campuses’ participation in each project was voluntary and the university rewarded them for participating. For this reason, the Office of the President did not develop campus savings and revenue targets for each project. However, by setting participation goals along with savings or revenue targets for the projects, the Office of the President could have evaluated whether each project had realized its full savings or revenue potential.

For example, the University Travel Council established an 80 percent usage goal for the Managed Travel Program (travel program), which illustrates how the Office of the President could have used participation goals to better hold campuses accountable for the Working Smarter initiative. The travel program provides discounted airline fare, car rental, and hotel reservations to university staff, along with streamlined billing and automatic registration into the university’s travel insurance program. Campuses retain any savings they generate, which they can use to offset other costs or provide more services to students. However, in 2014, university staff purchased only 46 percent of their travel through the program, with four campuses having participation rates of 27 percent or less. Even with this low level of participation, the university reported that the travel program achieved savings of $15 million in 2014. Nonetheless, the university projects that it could have saved another $9 million if campus participation had reached the 80 percent usage goal. Had the Office of the President mandated that all university staff use the travel program, the savings would have been even greater.

In recent years, campuses have reported increased spending to recruit nonresidents, reflecting their increased nonresident enrollment rates. This change in the campuses’ recruiting efforts has negatively affected their ability to mirror the diversity of the State, as discussed in Chapter 1. Specifically, as shown in Table 14, campuses spent $900,000 recruiting undergraduate nonresidents in fiscal year 2010–11. However, by fiscal year 2014–15, their nonresident recruitment expenditures had reached $4.5 million, a 400 percent increase over five years. As shown in Table 9 in Chapter 1, the percentage of domestic and international undergraduate nonresidents enrolled in academic years 2010–11 through 2014–15 grew by 80 and 214 percent, respectively, while resident enrollment growth decreased by 1 percent. During this same period, the percentage of the university’s undergraduate residents from underrepresented minority groups—which the university identifies as Chicanos/Latinos, African Americans, and American Indians—ranged from 24 to 30 percent, while the percentage of its domestic undergraduate nonresidents from underrepresented minority groups only ranged from 9 to 11 percent. Although the university stated that nonresident enrollment serves to help residents by exposing them to students from geographically diverse backgrounds and perspectives, the campuses’ efforts to recruit nonresidents divert already limited resources from the recruitment of residents.

Although we were able to identify that campuses have significantly increased their expenditures for nonresident recruitment, the campuses do not accurately track their spending between nonresident and resident recruiting. Most notably, the university, with the exception of its San Diego campus and the Office of the President, was unable to determine whether expenditures for salaries of staff involved in recruiting activities—which totaled $26.7 million from fiscal years 2010–11 through 2014–15—were for resident or nonresident recruiting. Furthermore, during that same time, Davis was unable to determine whether it spent $3.3 million of its recruiting expenditures on residents or nonresidents. Similarly, Berkeley, Merced, and Santa Cruz noted that some of their resident recruiting expenditures included costs related to recruiting nonresidents, but they were unable to determine the specific amounts. This inability to accurately determine their resident and nonresident recruiting expenditures prevents the campuses from ascertaining the costs associated with attracting nonresidents to their campuses.

In addition, the university underreported its fiscal year 2013–14 recruiting expenditures to a state senator by almost $8.0 million. To understand how the university was funding nonresident recruiting, a state senator requested in November 2014 that the university provide a breakdown of resident and nonresident undergraduate recruiting expenditures for fiscal year 2013–14. The university provided this information to the state senator in December 2014. However, when we compared the recruiting expenditures that the university reported to the state senator to those it provided us for that same fiscal year, we found errors totaling $1.7 million. Further, the university excluded the combined salaries of staff involved in resident and nonresident recruiting activities, which totaled $6.3 million, from the amount it reported to the state senator. As a result of these errors and exclusions, the state senator did not receive accurate information related to the university’s expenditures on recruiting efforts.

Source: California State Auditor’s analysis of recruiting expense data provided by campuses. Each campus indicated that no state funding was used to fund recruitment activities for nonresidents.

Note 1: Because most campuses could not distinguish salary expenses between resident and nonresident, we listed the combined totals separately. This table also excludes $3.3 million that the Davis campus could not distinguish as either resident or nonresident expenses, which related primarily to admission events, recruitment vendor services, and publications.

Note 2: We did not include the San Francisco campus because it does not have undergraduate students.

Finally, the university also provides developmental outreach to high school and community college students. The university accomplishes this through a variety of programs within its Student Academic Preparation and Educational Partnerships (SAPEP) programs, with funding of $24.6 million in fiscal year 2014–15. The purpose of SAPEP is to prepare California’s kindergarten through twelfth-grade student population for postsecondary education and community college students for transfer to a four-year university. SAPEP is a statewide effort to raise California student achievement generally and to close achievement gaps among groups of California students from the kindergarten through community college levels by focusing on first-generation, socioeconomically disadvantaged, and English-language learners.

Recommendations

To improve its internal operations and promote cost savings related to the nearly $13 billion it spent on employee salaries in fiscal year 2014–15, the university should conduct a systemwide assessment to identify ways to streamline and reduce its employee costs.

To ensure the reasonableness of the compensation the university pays its executives, it should include—to the extent possible—all items of compensation when setting or adjusting salaries and benefits, when conducting surveys and studies, and when comparing the compensation packages of its executives to those in similar positions outside the university.

To ensure that its process for establishing and revising salaries for its top executives is documented, thorough, and consistently applied, the university should implement the five outstanding recommendations from its 2013 internal review report by August 2016.

To improve the transparency and timeliness of its annual compensation report, the university should streamline the process it uses to prepare the report so it can be issued by April of each year.

To ensure that the home loan program is the best use of the university’s investment funds, it should conduct a cost benefit analysis that factors in the opportunity costs of investing in the home loan program as opposed to other higher-returning assets.

To maximize the savings and new revenue from the Working Smarter initiative and ensure that the university uses them for its academic and research missions, the Office of the President should take the following actions:

Immediately require that the campuses fully participate in all projects unless they can provide compelling evidence demonstrating a harmful effect.

By June 30, 2016, to the extent possible, implement a process to centrally direct these funds to ensure that campuses use them to support the core academic and research missions of the university.

Ensure that it substantiates that projects are actually generating savings and new revenue and that it can demonstrate how the university uses these funds.

To ensure that its recruiting efforts benefit residents, the university should prioritize recruiting residents over nonresidents. In particular, the university should focus its recruiting efforts broadly to ensure that it effectively recruits resident underrepresented minorities. For example, the university could establish a limit on the amount of funds it dedicates to nonresident recruiting. Further, it should develop a process to better track its nonresident and resident recruiting expenditures.

Chapter 3

The University of California Has Not Adequately Monitored Campus Spending and Has Not Completely Equalized Per-Student Funding

Chapter Summary

The University of California’s (university) total nonresident supplemental tuition revenue (nonresident revenue) increased by more than $403 million from fiscal years 2010–11 through 2014–15. The university claims that increased enrollment of nonresidents allows it to enroll more residents. However, the number of residents enrolled at the university actually decreased by 2,200—or 1 percent—from academic years 2010–11 through 2014–15, while total nonresident enrollment increased by 82 percent, or 18,000. Thus, contrary to the university’s claim, the amount of nonresident revenue the campuses received appears to have had little impact on the number of residents that they enrolled. In fact, our review of each campus’s spending of nonresident revenue revealed that they spent these funds across a variety of functional areas, some of which do not directly benefit residents. We also found that the university’s Office of the President did not regulate or monitor the campuses’ use of this revenue.

The Office of the President also exercised insufficient oversight of campuses’ use of state funds for programs that represent a considerable expense to the State. The university spends a significant portion of its state appropriation—$337 million of the $2.8 billion in state funds in fiscal year 2014–15 alone—on 18 programs that do not directly relate to teaching students. However, the Office of the President does not regularly evaluate whether continued funding of these programs is warranted or if other funding sources are available to support these programs.

In addition, the university’s efforts to equalize per-student state funding across its campuses were flawed and did not completely address past concerns regarding its methods for allocating state funding. After our 2011 audit identified inequity in per‑student funding among the campuses and a lack of transparency in how the university distributes funds to campuses, the university embarked in 2012 on an effort to address these concerns, which it refers to as rebenching. However, we identified several problems with rebenching, including the fact that the university based the formula it uses to redistribute funds not on the amounts it actually costs to educate different types of students but instead on costs it judgmentally assigned. The university recently addressed two of the flaws we identified, and it is now basing the rebenching allocation on actual enrollment and shortening the time to complete the rebenching period from six fiscal years to five.

Further, the university made rebenching allocation decisions that excluded $886 million from the amount it distributed to campuses through per-student funding for fiscal year 2014–15. This amount represented nearly one-third of the university’s total state funding for that year, significantly affecting the amount of per-student funding that campuses would receive from state funds. For example, if the university had included all the funds that the State provided, per-student funding could have been as much as $10,900 per student, instead of the $7,600 per-student amount for fiscal year 2014–15 that resulted from the university’s formula. Although the university’s actions may be justified, this information is not transparent or easily available to stakeholders.

Increases in Nonresident Tuition Revenue Did Not Result in Increases in Resident Enrollment

Contrary to the university’s public statements, the revenues from the increased enrollment of nonresidents from academic years 2010–11 through 2014–15 did not result in increased resident enrollment. The university asserted in its fiscal year 2015–16 operating budget that the increased revenue from nonresident tuition provides funds to improve the education for all students and enabled campuses to maintain and increase its enrollment of California residents. The Legislature also recently stated in an amendment to the Budget Act of 2015 that it intends for the university to use the revenue generated by the increased nonresident enrollment in academic year 2015–16 to support a growth in the number of residents enrolled. However, even though total nonresident revenue increased by $403 million—or 124 percent—from fiscal years 2010–11 through 2014–15, the number of residents enrolled at the university actually decreased by more than 2,200—or 1 percent—from academic years 2010–11 through 2014–15, as Table 15 shows. During this same five-year period, total nonresident enrollment increased by 82 percent, or more than 18,000.

Of particular note, resident enrollment at the Berkeley, Los Angeles, and San Diego campuses decreased by between 2 and 9 percent from academic years 2010–11 through 2014–15, even though these three campuses received the greatest amount of nonresident revenue in fiscal year 2014–15. Therefore, even though these three campuses received significantly more revenue from nonresident tuition than the other campuses, they did not enroll more residents; rather they each enrolled fewer. The Office of the President asserts that the declining trend in the enrollment of California residents during the past five academic years is completely tied to a reduction in state funding.

Table 15
Despite Large Increases in Nonresident Supplemental Tuition Revenue, Systemwide Resident Enrollment Has Declined Over the Past Five Academic Years
(In Millions)

Sources: California State Auditor’s analysis of revenue data provided by the University of California’s (university) Office of the President generated from its Corporate Financial System, and enrollment data obtained from the Office of the President’s UC Information Center Enrollment Data Mart.

Notes: This table reports revenue data on a fiscal year basis and enrollment data on an academic year basis as of the third week of Fall term. Dollars in table rounded to nearest hundred thousand.

The Resident Enrollment column includes certain students whom the university Board of Regents’ policy exempts from nonresident tuition consistent with Assembly Bill 540 (Chapter 814, Statutes of 2001). This column excludes medical residents and students enrolled in self‑supporting programs because the university does not currently distinguish them as residents or nonresidents.

Our review of each campus’s cumulative expenditures of nonresident revenue for fiscal years 2007–08 through 2014–15 revealed that the campuses spent nonresident revenue across a variety of functional areas, some of which did not relate to the instruction and education of students. The university defines its direct instructional costs as instruction, academic support, student services, and financial aid. For example, as Table 16 shows, Irvine and Riverside spent 92 percent and 94 percent, respectively, of their nonresident revenue on functions related to the direct costs of instruction. In contrast, Davis spent nearly 58 percent of its nonresident revenue on functions related to the indirect costs of instruction. Even though the campuses’ accounting systems can track their spending of nonresident revenue separately from other funding sources, in practice the campuses do not prioritize or budget their spending based on a particular funding source.

Because as recently as December 2014 the university publicly declared that nonresident revenue allows campuses to maintain and increase enrollment of residents, we expected the Office of the President to have directed the campuses to spend nonresident revenue on activities that result in enrolling additional residents. At the least, we expected the Office of the President to be monitoring how campuses spend nonresident revenue to ensure the prudency of their decisions. However, the only specific guidance that the Office of the President has given campuses was in February 2008 stating that they should use nonresident revenue to support nonresidents by covering their instructional costs and financial aid because the State does not provide funding for them. Other than this 2008 guidance, the Office of the President has given campuses broad flexibility to spend their nonresident revenue on their own priorities. Further, aside from a high-level collection of financial information that it uses primarily to detect spending anomalies, the Office of the President does not systematically monitor how each campus uses its nonresident revenue separately from other revenue sources at the campuses. In February 2016, in response to our questioning of this practice, the budget associate vice president indicated that the inclusion of this statement in the university’s past two operating budgets was an error. To clarify, she indicated that nonresident revenue has enabled campuses to continue to enroll California residents above state-funded levels and that it also contributes to the quality of the educational experience for all students. However, she stated that the university did not intend for nonresident revenue to serve as a substitute for state funds to further grow the enrollment of residents.

Lastly, we noted that although the Office of the President may receive nonresident revenue as part of an administrative assessment it levies on each campus, it cannot track either the revenues received or the expenditures made from this source. According to the Office of the President, its budget is primarily funded by this assessment and each campus pays its assessment using a variety of funding sources, such as nonresident revenue, state appropriations, and other student tuition and fees. For example, in fiscal year 2014–15, San Diego used $13 million in nonresident revenue to pay part of its $41 million assessment. However, because the Office of the President cannot identify the funding sources that campuses use for paying their assessments, it could not identify its expenditures made from the specific fund sources used by the campus. As a result, we could not evaluate how the Office of the President spent these nonresident revenues or any other funding source that the campuses use to pay their assessment.

The University Does Not Sufficiently Monitor Programs That Represent a Significant Use of State Funds

Although the Office of the President accounts for the use of state funds in the aggregate at the campus level, it does not sufficiently track and monitor how campuses use those funds. Rather, it gives campuses discretion in determining their own priorities for spending state funds within guidelines and policies that it has established. Each of the four campuses we visited indicated that its campus leadership decides its spending priorities. Although the university outlines its strategic budget priorities in its long-range financial plan, the plan does not specifically address the use of state funds and is not specific to individual campuses. Further, although the Office of the President collects high-level financial information that it uses mostly to detect spending anomalies, it does not know with any specificity how campuses use state funds.

Both the university and the campuses spend a significant portion of state appropriations—$337 million in fiscal year 2014–15 alone, as shown in Table 17—on 18 programs that do not directly relate to teaching students. When we inquired about these programs, the Office of the President took four months to provide us a list and supporting documentation because it does not actively track the programs’ funding allocations. In the absence of such tracking and monitoring of campus expenditures, the Office of President cannot know if campuses are using these state funds efficiently and effectively.

The State initiated many of the programs listed in Table 17 through specific budget appropriations. However, to give the university additional flexibility to manage budget reductions during the State’s recent fiscal crisis, the governor eliminated most dedicated funding from the state budget. For example, in fiscal year 2012–13, the governor eliminated dedicated funding totaling $27 million for the Charles R. Drew University of Medicine and Science, the California State Summer School for Mathematics and Science program, the Science and Math Teacher Initiative, the Programs in Medical Education, the California Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome Research (AIDS Research) program, and the California Subject Matter Project.

All current expenses of instructional departments, including expenses for research done as part of regular instructional programs.

Academic support

Expenses for activities related to educational departments, such as optometry and dental clinics. Also, the category includes expenses of all central and branch libraries administered by the campus general libraries.

Student financial aid

Expenses for scholarships, fellowships, and prizes.

Student services

Expenses for services to the student body as a whole, such as health services and counseling programs.

Functions Supporting the Indirect Costs of Instruction

Description

Operation and maintenance of plant

All expenses (including salaries and wages) required to maintain and operate the physical plant.

Institutional support

Expenses of the general administrative offices, such as the Regents of the University of California, president, vice presidents, and chancellors.

Research

Expenses of all separately organized research units, including research institutes, centers, bureaus, laboratories, and stations.

Public service

Expenses for activities intended to serve the general public, such as campus cultural events, operating museums, and providing cooperative extensions.

Auxiliary enterprises

Expenses of the auxiliary enterprises, intended to be self‑supporting, operated primarily to serve the students.

Sources: California State Auditor's analysis of expenditure data provided by the University of California's (university) Office of the President. The Office of the President generated this information directly from its Corporate Financial System. The definitions of direct and indirect instructional costs were sourced from the university's report titled University of California: Expenditures for Undergraduate and Graduate Instruction and Research Activities, February 2015.

Note 1: Highlights correspond to the three functional areas in which the campus or the university system spent the greatest amount of its cumulative expenditures from nonresident supplemental tuition during fiscal years 2007–08 to 2014–15. Dollars rounded to the nearest hundred thousand.

Note 2: The Office of the President receives nonresident supplemental tuition revenue from campuses but could not provide us with a report of its expenditures from that source.

Note 3: Percentages may not total 100 percent due to rounding.

When the State eliminated dedicated funding for these programs, the university did not take advantage of the additional financial flexibility to evaluate whether to reduce or eliminate the use of state funding to support these programs. Most importantly, the university did not systematically or regularly analyze the programs to determine whether it could identify more effective ways of financing them. For example, the university’s chief financial officer noted that one program—the Neuropsychiatric Institute with locations at the Los Angeles and San Francisco campuses, which received almost $33 million in state funding in fiscal year 2014–15—is financially successful and could potentially find alternative sources of funding.

According to the budget associate vice president, the Office of the President reevaluates funding for a program if an issue arises, if state support is cut, or if other developments require setting priorities that could ultimately result in the program’s elimination. The Office of the President indicated that a committee performed such an evaluation in fiscal year 2011–12. However, because this review focused on research programs, the two resulting reports the committee issued in 2014 reviewed only four of the programs in Table 17: the California Institutes for Science and Innovation, AIDS Research, the San Diego Supercomputer Center, and the Medical Investigation of Neurodevelopmental Disorders (MIND) Institute. Based on its review, the committee recommended reducing funding for AIDS Research over several years while the program identified other funding sources, and it recommended eliminating funding for the MIND Institute because it was operating successfully. However, the Office of the President did not implement either of these recommendations and instead continued to fund both programs at the same levels. Thus, the evaluation resulted in no substantial change to the university’s spending priorities.

In addition to not fully evaluating whether dedicated state funding is appropriate for these programs, the university made a questionable decision about its retirement plan that has increased its need for state funding. The university’s retirement plan is the second largest recipient of state funds, as listed in Table 17. Beginning in 1990, the university suspended both its and its employees’ contributions into the university retirement plan. The State also suspended its executive branch contributions to the state retirement system but only for one year. The university indicated that it made this decision based on an actuarial study that concluded that the retirement plan was adequately funded for many years into the future. However, the university acknowledged that this decision created a serious problem: Its retirement plan was unfunded by $12.1 billion as of July 2014.

Table 17
The University of California Failed to Monitor and Evaluate Programs That Cost $337 Million in State Funds Annually

Provides a four-week summer residential program for high school students who have demonstrated an aptitude for academic and professional careers in science, technology, engineering, and mathematics.

Davis, Irvine, San Diego, Santa Cruz

1.6

Science and Math Teacher Initiative†

Recruits and prepares undergraduates to explore careers as math or science educators.

All campuses except San Francisco

1.1

Total

$337.3

Source: California State Auditor’s analysis of data provided by the University of California’s (university) Office of the President. The Office of the President indicates that the amounts for these programs should be considered base amounts because campuses may use other state funds to operate these programs.

Note: We excluded the university’s allocation of $52.1 million for student financial aid from this list because, unlike the other programs listed, it directly benefits students.

* This program was excluded from the rebenching formula.

† This program formerly had dedicated funding in the annual state budget act.

‡ Although technically not a program, the State appropriated $89.1 million in fiscal year 2012–13 to help fund the university’s retirement plan. We included it in this table because the university has continued this allocation of $89.1 million per year to fund its retirement plan using state funds.

According to the university, it knew as early as 2005 that the university and its employees needed to resume their contributions to the retirement plan, but it delayed acting because of the State’s unwillingness to fund the university’s contribution. In particular, the university continues to seek parity with the California State University and California Community Colleges, which it notes receive funding for their employer shares above their base budget allocations from the State. As a result, the university did not restart contributions to the retirement fund until 2010—five years after it recognized the problem it had created. Even now, the university contributes to its retirement plan at a lower rate than state agencies pay into the California Public Employees Retirement System (CalPERS). CalPERS requires state agencies to contribute nearly 25 percent of the gross pay of all their nonpublic-safety employees, while the university contributes only 14 percent. The university indicates that it has a plan in place that uses borrowing from its investment pool and additional state funds, along with other actions, to achieve full funding of its retirement plan by 2040.

The State provided $89 million for the university’s retirement plan in fiscal year 2012–13, an amount the university states it continues to fund from the annual state funding it receives, but the university believes the State’s share of these contributions should be much higher—as much as $354 million for fiscal year 2015–16. Although this is a matter for the university, governor, and Legislature to decide, the university could have minimized its unfunded liability—and thus the need for large retirement contributions—had it not suspended contributions into the program and then delayed their resumption for several years after recognizing this problem.

Despite the University’s Recent Efforts, Per-Student State Funding Inequities Persist Among the Campuses

The university has taken steps intended to address unequal per‑student state funding at different campuses, but it will need to make changes to its funding formula to achieve genuine per-student funding equity. Specifically, some of the key elements the university adopted in its effort to equalize state funding are problematic and distort the formula’s effects. As a result, the methodology the university used for the first three years of its efforts to equalize per-student state funding had fundamental flaws. The university announced in November 2015 that it intended to address some of the problems with its formula that we identified in the course of this audit. However, it will need to address these issues and factor in the effect of rapidly increasing nonresident enrollment on its per‑student state funding before it can ensure genuine funding equity among the campuses.

The University Used a Flawed Funding Formula in Its Initial Efforts to Equalize Its Per-Student Distribution of State Funds

The university’s effort to change how it distributes state funds to campuses has not completely addressed historical concerns about the inequity of its per-student distribution of state funds. Our July 2011 audit titled University of California: Although the University Maintains Extensive Financial Records, It Should Provide Additional Information to Improve Public Understanding of Its Operations, Report 2010-105, found problems with the university’s method of distributing funds to campuses as well as significant discrepancies in per-student funding levels among campuses.

In particular, we determined that campuses with a higher proportion of underrepresented minority students had a lower than average per-student base funding. As a result of these and other concerns, the university formed a committee in June 2011 to consider how to make its formula for distributing state funds to campuses more transparent and equitable. The committee recommended a six-year process that would start in fiscal year 2012–13, and would require additional state funding to avoid reducing State funding to any campus. The university believes that equal per‑student state funding across campuses is important to ensure that all university students receive a high-quality education regardless of the campus they attend and to maintain the integrity of the system. The university adopted the committee’s recommendations the following year, in 2012.

As the first step, the committee determined that the Los Angeles campus had the highest level of per-student state funding among the campuses. To raise the level of state funding other campuses should receive to the same level, the university assigned specific funding for underfunded campuses over a six-year period. This effort, referred to as rebenching, required the university to allocate a total of $37 million per year to the underfunded campuses from fiscal years 2012–13 through 2017–18.8 The formula the university used to arrive at the $37 million is depicted in Table 18.

However, a number of the key assumptions the university used in its formula lacked justification. In particular, the university set aside the state funding used for six programs—amounting to $186 million per year in fiscal year 2014–15—from the rebenching formula. According to the budget associate vice president, the committee did not include the programs’ state funding as part of each respective campus’s base allocation because they do not directly relate to student instruction and including that funding would make certain campuses appear better funded than others. For instance, had the university not excluded these six programs from the rebenching formula, its per‑student funding target amount would have increased from $6,458 to $7,747. Further, the annual amount of funds that the university would have needed to allocate under rebenching would have increased from $37 million to $52 million.

Note: Excludes the Merced and San Francisco campuses because of their unique funding needs.

* Weighted enrollment is based on enrollment multiplied by a weight of 1, 2.5, or 5 depending on the type of student—their grade level and course of study.

† Funding per weighted student at the other 7 campuses in the fiscal year 2011–12 base year ranged from $4,275 at Santa Barbara to $6,270 at Davis.

‡ By fiscal year 2014–15, the total allocation for these excluded (set aside) programs increased to $186 million because of cost adjustments.

§ Annual funding increases per campus—excluding Los Angeles, Merced, and San Francisco—ranged from $1.3 million for Davis to $9.1 million for Santa Barbara. Los Angeles was excluded because it had the highest base-year per-student costs and other campuses were being brought up to its funding level.

Although we believe excluding programs from the rebenching formula is reasonable, the committee generally excluded only the more costly programs. To calculate per-student funding at the campuses accurately, the university should exclude all programs that do not relate to instruction from the rebenching formula rather than just some. In addition to the six programs that the university did exclude, our review identified another 12 similar programs, the funding for which totaled $151 million in fiscal year 2014–15.

Another feature of the rebenching formula also raises questions: The committee’s assignment of student weights to different student types was based on the consensus of the committee instead of actual costs. The university uses weighting to represent the varying costs of educating different types of students; in effect, the university assigns a number to each student type depending on course of study and grade-level. For example, as shown in Table 19, the university assigns a weight factor to resident undergraduate students of 1 but assigns a weight factor of 5 to health science students preparing for medical professions, indicating that educating medical professional health science students is five times more costly than educating undergraduate students. However, the university did not base those weight factors on the actual costs of educating different student types because its rebenching committee believed that performing a cost study would be difficult and expensive, and that the results would be predictable. As a result, the university’s per‑student allocations of state funds to each campus may not reflect the campuses’ actual costs of educating those students.

Source: Committee Report and Recommendations, Rebenching Budget Committee, University of California, 2012.
Note: Some smaller categories were excluded from the descriptions in the table.

In contrast, the state of Texas has a board that conducts formal cost studies in order to guide its allocations of state funding to its public universities. The Texas Higher Education Coordinating Board’s (Texas board) methodology—which the rebenching committee considered when determining the weight factors the university eventually implemented—is relatively simple and determines costs at that state’s public universities using data that campuses include in their annual financial reports. Using this cost study, the Texas board assigns weight factors for various categories of students depending on their area of study and college grade level. Had the university followed a similar approach, it could better justify the weight factors in its formula.

In addition to addressing past state funding inequities by redistributing the $37 million annually to campuses over six years, the university also intended its rebenching formula to provide a process for equitably and transparently allocating future state funding to campuses. In fiscal year 2014–15, the university did not include $886 million—nearly one-third of the university’s total state funding for that year—in its calculation of per-student funding. As shown in Figure 10, the university excluded from its rebenching process $427 million in state funding that it used for debt service payments. In addition, the university excluded $24 million in state funding that it used for programs that the Office of the President administers. Finally, the university set aside $435 million in funding the university asserts is not related to the number of students the campuses enroll, which includes $150 million for fixed costs at each campus and $285 million for specific campus programs.

After the university removed those funds from the per-student funding calculation, $2.1 billion remained, which the university indicates is the basis that should be used to calculate per‑student funding at each campus. However, campuses spend an indeterminate portion of these funds on other programs—such as those described earlier and listed in Table 17—and for assessments to the Office of the President. The amounts of state funding that the four campuses we visited used to pay this assessment in fiscal year 2014–15 were San Diego—$389,000; Los Angeles—$35 million; Santa Barbara—$6 million; and Davis—$8 million.

The impact of the university’s allocation is that almost one-third of its state funding is allocated to various programs and purposes that are not based on student enrollment, thereby decreasing the amount of funding available to allocate per student. Determining the amount of state funding that the university actually allocates per student will result in different answers depending on which amounts are excluded. As shown in Figure 10, if the university allocated all of its state funding based on student enrollment, the amount of state funding allocated per student would have amounted to almost $10,900 in fiscal year 2014–15. However, under the university’s rebenching formula, the amount left to educate students after the university’s exclusions equated to about $7,600 per student in that fiscal year. When the university publishes its per‑student spending amount in its annual Budget for Current Operations, it uses yet a different methodology, which further complicates determining the amount of state funding it actually spends per student.

Figure 10
The University of California Did Not Apply About a Third of Its Fiscal Year 2014–15 State Allocation to Its Calculation of Per-Student Funding

Source: California State Auditor’s analysis of the university’s rebenching methodology.

* Total number of students based on the university’s 2014–15 budgeted weighted enrollment.

† Adjustments include funds for Centers for Labor Research and Education, debt service for Merced’s Classroom and Academic Office Building, the university’s California Blueprint for Research to Advance Innovation in Neuroscience, and for improving graduation rates for disadvantaged students.

‡ The university does not know how much state funds campuses use to pay for these set asides. Nevertheless, the university excludes these amounts from the per-student funding calculation.

§ The additional set-asides are set-asides that do not receive cost adjustments every year. These are excluded from the university’s per-student funding calculation and include $52.2 million for financial aid, $7.3 million for research projects such as the San Diego Supercomputer Center, $8.3 million for the Charles R. Drew University of Medicine and Science, and $15 million for the Merced campus.

The university does not include these funds in its calculation of per-student funding for rebenching purposes.

Although we agree the university can justifiably exclude from its rebenching formula the state funding it uses for certain programs that do not directly relate to educating students, it has not been transparent about the amounts it excludes because it has not made its allocation amounts publicly available. According to the budget associate vice president, the university believes that the process is too complicated for the public to understand. However, we believe the manner in which the university chooses to allocate the state funding it receives is invaluable information for both decision makers and the public. Further, as shown in Figure 10, the university can present the formula in a way that fully and accurately represents the methodology it uses.

In addition, we also believe that the university’s exclusion of stakeholders from the rebenching committee may have contributed to the perception that its funding formula lacks transparency. According to the budget associate vice president, the university decided that the committee should include only high-level university staff and faculty in part because it does not typically involve students or the State in decisions concerning its use of state funding. The chief financial officer, who co-chaired the committee, indicated that the committee had numerous viewpoints because it included university staff from all campuses and the Office of the President. However, stakeholders have expressed concern about ensuring equitable funding among the campuses; and legislators, the governor, and students have also raised questions regarding tuition increases and the general lack of transparency of the university’s operations. Given these circumstances, the university could have made the rebenching committee’s work more transparent by allowing some level of involvement by key stakeholders. Such an approach would have also ensured that the university considered all stakeholders’ viewpoints in the rebenching process.

Increases in Nonresident Enrollment Have Exacerbated Per-Student Funding Inequities, Especially for Underrepresented Students

The university does not include nonresident revenue in the rebenching formula. Nevertheless, this revenue significantly impacts actual per-student funding levels among the campuses. In the Budget Act of 2015, the Legislature expressed its intent that the university use nonresident revenue to support resident enrollment growth. However, the university’s practice of increasing nonresident enrollment has instead amplified inequities in per-student funding among the campuses because the university allows campuses to retain the nonresident revenue they generate. As we discuss earlier, three campuses have increased their nonresident revenue by far greater amounts than the other campuses. Specifically, the Berkeley, Los Angeles, and San Diego campuses each generate more than $100 million in nonresident revenue per year, while the remaining five undergraduate campuses included in rebenching generated a combined total of just $248 million dollars in fiscal year 2014–15.

Using current enrollment, our analysis shows that the two highest‑funded campuses in terms of per-student state funding after three years of the university’s rebenching process are Berkeley and Los Angeles. These campuses also enroll the most nonresidents. Further, our analysis indicates that the Berkeley and Los Angeles campuses received $2,100 and $1,400 more, respectively, per student in state funds in fiscal year 2014–15 than Davis—the lowest‑funded campus. However, when nonresident tuition revenue is combined with state funding, the fiscal year 2014–15 discrepancy between these campuses and Davis increases to $3,900 per student and $2,300 per student, respectively.

As we show in Figure 11, the highest-funded campuses when we include nonresident revenue are generally the campuses with the lowest percentage of underrepresented minority students.9 For example, the highest-funded campus—Berkeley—is also the campus with the lowest percentage of underrepresented minority students. As a result, these funding disparities have disproportionately affected underrepresented minority students, which echoes a finding from our July 2011 report that the campuses with the most underrepresented students were also the lowest-funded campuses.

During the Course of This Audit, the University Corrected Two Deficiencies in Its Original Rebenching Formula

In November 2015, during the latter stages of the fieldwork for this audit, the university announced that it would be making changes that addressed deficiencies we had identified with its rebenching formula. First, the university’s original rebenching formula—upon which it has based its campus allocation amounts since fiscal year 2012–13—used fiscal year 2011–12 budgeted student enrollment for each campus rather than using each year’s actual student enrollment. By using budgeted enrollment rather than actual campus enrollment, the university failed to design a method for ensuring equity in per-student funding. According to our projection, Los Angeles and Berkeley, the same two campuses with the highest per-student funding before rebenching, remained the highest-funded campuses three years later when using actual enrollment at those campuses. Thus, the university’s original rebenching formula made it appear that it would have equalized per-student funding by fiscal year 2017–18; however, by not adjusting for enrollment changes, it would have only nominally improved these inequities. To address this concern, the university incorporated current campus enrollments into its rebenching formula starting in fiscal year 2015–16.

Figure 11
Per-Student Funding by Source and Proportion of Underrepresented Minority Students by Campus
Fiscal Year 2014–15

Sources: California State Auditor’s analysis of data obtained from the University of California’s (university) Office of the President’s UC Information Center Enrollment Data Mart and other operational data.

Note 1: Our per-student funding calculation is based on fall enrollment headcounts and the university’s methodology for weighting enrollment, and it includes both resident and nonresident undergraduate and graduate students in its weighted enrollment.

Note 2: We excluded the Merced and San Francisco campuses because we included only the campuses that the university included in rebenching in this chart. For comparison purposes, the percentage of underrepresented minority students at the Merced and San Francisco campuses was 50 percent and 15 percent, respectively; the per-student state funding was $11,777 and $8,217, respectively; and the per-student nonresident tuition revenue was $1,121 and $144, respectively.

Note 3: The university considers underrepresented minority students to be Chicanos/Latinos, African Americans, and American Indians.

Our second concern was that the university planned for its rebenching process to take six years and that it did not accelerate the plan, even though it had sufficient state funding to complete it sooner. After the university began its rebenching process in fiscal year 2011–12, it had available state appropriations of $362 million to allocate through rebenching. Nonetheless, over the past three years, the university allocated only $111 million toward rebenching. If the university had allocated just another $111 million of the remaining $251 million in available state funding to rebenching, it could have completed the rebenching process before fiscal year 2015–16, three years earlier than it planned. After we questioned the university about its failure to shorten the rebenching time frame, its chief financial officer stated that the university planned to accelerate the rebenching process by one year because it recognized that it had sufficient state funds to complete the process sooner. According to the university, it did not accelerate the rebenching earlier because it wanted to minimize the impact on the campuses that would receive smaller portions of the state funding under the rebenching process. We do not consider this to be a compelling reason. Although we understand that campuses receiving higher per-student funding might prefer that the rebenching process take the full six years, this delay would only serve to further disadvantage students at lower‑funded campuses.

Recommendations

To determine if the campuses are using funds to further the goals of the University of California system and the Legislature, the Office of the President should begin regularly monitoring and analyzing how campuses are using both state funds and nonresident supplemental tuition. If, after the close of the fiscal year, the Office of the President determines that campuses are not using state funds and/or nonresident supplemental tuition in accordance with those goals, the Office of the President should take steps to correct the campuses’ spending decisions as soon as possible.

To ensure that it spends state funds prudently for programs that do not directly relate to educating students, the university should do the following:

Track spending from state funds for programs that do not relate to educating students.

Reevaluate these programs each year to determine whether they continue to be necessary to fulfill the university’s mission.

Explore whether the programs could be supported with alternate revenue sources.

To increase its transparency and help ensure that it can justify its spending decisions, the university should make publicly available the amounts of state funding it allocates toward per-student funding, as well as the amounts it or campuses spend for programs that are not directly related to educating students. The university should publicly present the ranges of per-student funding based upon the amount of funding excluded from the formula.

To ensure that its rebenching efforts lead to equalized per‑student funding among the campuses, the university should do the following:

Include actual enrollment numbers in its rebenching formula.

Adopt a methodology that it can use, at least every three to five years, to update its weighting system to ensure the weight factors take into account campuses’ actual costs of instruction, using the cost study that we recommend in Chapter 1 and other revenue sources if necessary.

Exclude from its rebenching calculation all state funding it uses for programs that do not directly relate to educating students. The university should exclude these programs only after it has evaluated them in accordance with the recommendation we made previously.

Include stakeholders such as students, legislative and executive branch staff, and student groups in future discussions of rebenching to ensure that it considers their viewpoints and to increase transparency regarding its funding decisions.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the scope section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

Footnotes

1 The admission data we obtained from the university contained freshman applications for the fall term. Go back to text

2 The university considers underrepresented minorities to be Chicanos/Latinos, African Americans, and American Indians. Go back to text

3 When evaluating applications, the university uses weighted GPAs that give students extra points for grades C or better in honors or advanced placement courses. We also use weighted GPAs in our analysis. We did not include international nonresidents in this analysis to address the university’s concern that weighted GPAs are not comparable to those of residents. Go back to text

4 The university considers underrepresented minorities to be Chicanos/Latinos, African Americans, and American Indians. Go back to text

5 New undergraduate enrollment includes incoming freshman and transfer students. Go back to text

6The Chronicle of Higher Education is a newspaper that presents news, information, and jobs for university faculty and administrators. Go back to text

7 For the San Francisco campus chancellor, this increase does not include pay from endowment funding. Go back to text

8 The university excluded Merced and San Francisco from its rebenching process because of their unique funding needs. Go back to text

9 The university considers underrepresented minorities to be Chicanos/Latinos, African Americans, and American Indians. Go back to text